Management Accounting Report: Analysis and Planning Tools

This report on management accounting for ABC Ltd. explores various facets of managerial accounting. It defines management accounting, differentiating it from financial accounting, and discusses different management accounting systems such as job costing, inventory management, price optimization, and cost accounting. The report then delves into the integration of these systems within an organization and their impact on operational efficiency, using ABC Ltd as a case study. It further compares costing techniques, including marginal and absorption costing, with detailed calculations of cost per unit, cost of production, and profitability statements. The report also examines planning tools in budgetary control, outlining their benefits and drawbacks, and how they are used in preparing and forecasting budgets. Finally, it compares how companies adapt management accounting systems to address financial problems and concludes that management accounting is essential for sustainable success, highlighting planning tools for solving financial issues.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1 ...........................................................................................................................................3
Meaning of management accounting system...............................................................................3
Different types of management accounting systems and their essentials and benefits................4
Integration of management accounting systems and management accounting reporting within
organization..................................................................................................................................6
TASK 2............................................................................................................................................6
Different costing techniques........................................................................................................6
Cost per unit, cost of production and total cost of sales.............................................................7
TASK 3............................................................................................................................................9
Benefits and drawbacks of various kinds of planning tools applied in budgetary control..........9
Use of planning tools for preparing and forecasting budgets....................................................10
TASK 4..........................................................................................................................................12
Comparison regarding how companies are adapting management accounting systems for
confronting financial problems..................................................................................................12
Management accounting leads organizations towards sustainable success...............................14
Planning tools for accounting for solving financial issues........................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is defined as a procedure of applying professional knowledge,
skills and techniques in order to prepare accounting information in such a way, which assists the
managers of a business organization in their decision-making process, formulation of strategies,
plan, polices relating operations, rational use of limited resources, safeguarding of assets and
disclosure to company's management (Agrawal, 2018). In the present report, concept of
management accounting will be studied in the context of ABC Ltd which is a medium-sized
business entity operating in manufacturing sector.
Different types of management accounting system along with their benefits will be
discussed in the report. It will also include how management accounting reporting is integrated
within the company. Further, a comparison will be done regarding how various companies
applies the techniques and tools of management accounting for responding to the financial
problems. Moreover, various planning tools of budgetary control will be highlighted in this
project report and how such management accounting leads an organization towards the
sustainable success.
TASK 1
Meaning of management accounting system
Management accounting also called as managerial accounting is described as a process of
presenting the financial and cost information for the purpose of helping the management of a
company in the formulation of policies and strategies that are to be adopted by the entire
organization. In simpler language, it is that field of accounting which assists the managers of
ABC limited in performing their core functions such as planning, organizing, monitoring and
controlling the activities of the business entity (Management accounting - What is management
accounting, 2019).
The primary thing which distinguish management accounting from financial accounting
is that managerial accounting is concerned with preparation of financial report for the purpose of
aiding the internal team of the organization in their decision-making process while financial
accounting is a process of preparing financial statements of the company for the purpose of
communicating it same to the interested parties or stakeholders. Management accounting
considers monetary and non monetary information while financial accounting considers only

information relating to financial nature (Amanollah Nejad Kalkhouran, Hossein Nezhad Nedaei,
and Abdul Rasid, 2017).
Different types of management accounting systems and their essentials and benefits
Managerial accounting consist of various kinds of other systems which aids the managers
in adding value to the organization. Managers use different systems of management accounting
for the purpose of obtaining efficiency in the operations within the business. These are as
follows:
Job costing system:
This is referred to as a expenditure monitoring system which is concerned with assigning
manufacturing expenses to each product separately. This makes the managers to keep the track
of company's costs and expenditures. Job costing is related with ascertainment of manufacturing
expenses by segmenting them in direct material, labour and manufacturing overheads (Azmitov
and Korabelnikova, 2015).
Essentials and benefits:
This system is required in the business as it enables the management in calculating the
profit earned on individual jobs which in turns facilitates them in their decision-making that a
particular job is profitable enough to continue it in the future or shall it be closed down.
Inventory management system:
In the simpler words, inventory management is keeping a track of company's non
capitalized assets such as inventory and stock items. It is a systematic procedure of attaining,
storing and creating profits from the non capital assets. Availability of adequate inventory at all
times is the main motive of inventory management system. This facilitates a smooth flow in the
production process (What is inventory management, 2019). There are inventory management
systems such as:
 LIFO
 FIFO Just in time purchase
Essentials and benefits:
The main advantage of employing inventory management system within the business is
that it helps in reducing the unnecessary inventory carrying and holding costs. This in turn assist

in reducing the requirements of working capital of the organization. Moreover, it helps in
preventing loss from theft, inventory manipulation, returns and spoilage.
Price Optimizing systems:
It refers to a systematic procedure of ascertaining a rational retail value of the products
and services of the company. It is basically a process of finding such a price at which company
gets maximum profits and which the consumer are willing to pay. For example, if the price is
fixed too high, then consumers will not buy the product and if the prices are fixed too low, then
company will not be able to earn profits (Christ and Burritt, 2015). Thus, price optimization
system assists the managers in setting an optimum prices of products and services on the basis of
market demand of the products.
Essentials and benefits:
Prize optimization system requires; cost models, analysis of competitive management,
models of customers elasticity and optimization techniques. The advantage of this system is that
proper price for the product or service is determined scientifically in accordance with the market
forces. This helps in increasing the profitability of the company.
Cost accounting system:
It is defined as a process which is concerned with anticipation of costs of company's
products for the purpose of analysis of profitability, cost control and inventory valuation.
Estimation of the costs of activities of business accurately is the essence of profitability of the
company. This indicates that ABC company shall know which of its operations are profiterole
while which operations are consuming more of resources and does not live up to the expectations
of business.
Essentials and benefits:
The advantages of cost accounting system is that enables the management in reducing the
,cost, wastage, losses and loopholes by setting standards/bench-marks for every activity within
the organization. It facilitates the managers in identifying the reasons behind profit or loss with
the help of which they take remedial steps for keeping the profitability of company on right
track.

Integration of management accounting systems and management accounting reporting within
organization
Management accounting systems and reporting integration with the other aspects of the
business is necessary because it helps in achieving the efficiencies in the operations. Since, the
information provided by management accounting reports are of qualitative and quantitative
nature, therefore, managers are able to form more quality decisions relating to cost, pricing,
inventory management and cost control. Managerial accounting is integrated with the quality
management in the sense that systems of management accounting assists in measuring and
monitoring the quality related costs which leads to continuous improvement in the processes of
the organization (Francioli and Quagli, 2016). Like inventory management system adopted by
ABC limited helps in managing the inventory in the best way possible. This increases the
efficiency in the production processes by making available the raw material at all time. This
helps in avoiding the stoppage in production process that ultimately results in higher
productivity. Moreover, proper management of inventory also helps in establishing a loyal
customer base by offering the consistent products and services. Thus, this is how the
management accounting systems integrates with the other processes of the business and
improves them for achieving higher efficiency.
TASK 2
Different costing techniques
Marginal costing:
It is defined as a technique of cost accounting in which the marginal cost meaning of
which only variable cost is considered for calculating the unit cost of production. This means that
fixed costs for the relative accounting period is entirely written off against contribution.
Marginal costs of a product is calculated by adding up the direct material& labour, direct
expenses and variable overheads.
Absorption costing:
It refers to a technique of cost accounting in which all the manufacturing expenses
including both fixed and variable are considered for calculating unit cost of production. This
method is required to be adopted by the companies as it is needed for external financial and
income tax reporting (Ghasemi and et.al., 2016).

Cost per unit, cost of production and total cost of sales
Assessment of cost per unit: Marginal costing
Particulars Figures (in £)
Direct material 10
Direct Labour 20
Variable costs 5
Total cost per unit 35
Cost per unit: Absorption costing
Particulars Figures (in £)
Direct material 10
Direct Labour 20
Variable costs 5
Fixed manufacturing costs (100000 / 20000)
= 5
Total CPU 40
Profitability statement as per marginal costing system
Particulars Figures (in £)
Net Figures
(in £)
Revenue 800000
Direct material (DM 180000
Labour expenses 360000
Variable overheads 90000
Total expenses 630000
Less: Stock at the end of period 70000
Marginal cost of sales 560000
Add: Fixed production costs 100000
Total production cost 660000
Net profit (NP) 140000

Income Statement under Absorption costing:
Particulars Figures (in £)
Net Figures (in
£)
Sales 800000
DM 180000
Labour cost 360000
Variable overheads (VO) 90000
Fixed overheads (FO) 100000
Total expenditure 730000
Less: closing inventory 80000
Cost of sales (COS) 650000
NP 150000
Income statements when production units are 19000 and closing stock is 3000 units
Under marginal costing
Particulars Figures (in £)
Net Figures
(in £)
Direct material 190000
Direct labour 380000
VO 95000
Total expenses 665000
Less: closing stock 105000
Marginal cost of sales 560000
Fixed production costs 100000
Total production cost 660000
NP 140000
Absorption costing
Particulars Figures (in £)
Net Figures
(in £)
Sales 800000

DM 190000
DL 380000
VO 95000
FO 100000
Total expenses 765000
Less: closing stock 80000
COS 685000
NP 800000
Interpretation :
It can be observed that profits when production units were 18000 and when it 19000 are
same under both the methods. This is due to fact that as production units increased by 1000 units,
closing stock also increased by 1000 units which nullify the effect of each other.
Reasons for change in the profit or loss under both the methods :
The primary reason is that closing stock under the marginal costing method is valued at a
price which is exclusive of fixed manufacturing fixed overheads while in the absorption costing,
the closing stock is valued at a price which is inclusive of all the expenses that is both variable
and fixed overheads.
TASK 3
Benefits and drawbacks of various kinds of planning tools applied in budgetary control
Budgetary control is described as a process of formulation of budgets for various
operations of the business and comparison of anticipated figures with the actual results for the
purpose of arriving at some deviations or variances. The object is to identify the variances and
correct them for attaining the efficiencies in the operations of the ABC Limited. There are
different types of planning tools which the managers of the company uses for controlling the
activities of business (Johnstone, 2018). These are as follows:
Static budget:
In the simpler terms, a static budget is referred to a budget which does not variate with
the change in sales. This budget incorporates the estimated values relating to expenses and
income which are conceived before the beginning of budget period.
Benefits:

The foremost advantage of this kind of budget is that is easy to form, understand and
implement due to the fact no continuous changes are to be made throughout the intended
accounting period. It is also helpful in the sense that preparation of static budget makes it easier
for the management in determining the anticipated taxes which are paid in the future accounting
period (What Are the Advantages and Disadvantages of Using a Static Budget, 2019).
Drawbacks:
The biggest drawback of static or fixed budget is that it does not allow any flexibility.
This means that no changes can be done in the static budget for extracting the benefits of
changes in revenues and expense as the time period progress. For example, if by the of
comparing the budgets with actual results, the organization finds any area which is
underperforming, it can not re-allocate the resources for bringing the efficiency in such areas.
Flexible budget:
This budgets are those budgets which allows the managers to adjust the anticipated
amounts as the time period progress. In other words, this method allows room for budget
inflation which depicts more realistic forecasting through which more reliable results could be
drawn.
Benefits:
More reliable and realistic forecasting is done by this type of budgeting since it takes into
consideration the budget inflation. This leads to better monitoring and controlling of the
activities of the business. Moreover, the budgets are updated with the latest data.
Drawbacks:
The main limitation of this type of budgeting is that it is confusing. This is because these
budgets requires continuous planning for keeping the track of expenditures and making
adjustments for the variations for the intended time period (Kalkhouran and et.al., 2015). Further,
such budgets allows managers to spend more than the boundaries set for the specific time period.
Zero base budgeting:
It is a type of budgeting in which the managers start with scratch or zero base for each of
item or activity that is to be included in the budget list. Each of the activity is comprehensively
evaluated and analysed. The main objective of this zero base budgeting is to reduce the
unnecessary expenses or costs by looking closely in what areas, the costs can be cut in order to
bring efficiency in the business processes.

Benefits:
The biggest advantage of this budgeting is that it does not create a budget on the basis of
past or previous budget data. Rather, the budget is prepared from a zero base which helps in
optimal allocation of resources within the various departments of the business. Since, budget
inflation and other changes relating to sales, expense are taken into consideration in between the
time period, the forecasting made by applying this technique is more accurate and correct (Luft,
Shields and Thomas, 2016).
Drawbacks:
Although zero based budgeting offers many advantages to the organization, it has some
drawbacks which makes its application more difficult within the business. This budgeting suffers
from the limitation that it requires large number of skilled employees who can perform this type
of budgeting. Moreover, zero based budgeting requires huge amount of time which is sometimes
not feasible for the smaller or medium size organization.
Use of planning tools for preparing and forecasting budgets
Managers of ABC Ltd applies different planning tools for preparing and forecasting of its
expenditures and income. For example, cash flow statements helps in assessing the pattern of
how company generates its cash inflows and what are the activities which takes up the most of
the financial resources. Below is a cash budget by which ABC Ltd., management ascertains how
cash inflows and outflows would take place within the business over a specific period of time:
CASH BUDGET
(For the next three months)
Particulars Initial
investment August September October
Sales of financial products
Number of consumers 28000 30800 33880
Average cost 38 38 38
Total revenue from products (1) 1065167 1171683 1288852

Broking services
Number of consumers 32000 40000 42000
Average cost 14 14 14
Total revenue from services (2) 440320 550400 577920
Total cash inflows (1 + 2) 1505487 1722083 1866772
Cash outflows
Office expenses 15000 0 0 0
Plant & Machinery 700 0 500 0
Tools & equipment’s 500 400 250 200
Salaries & wages 2000 2000 2000
Supplier’s commission 3000 2500 2200
Advertisement 400 400 400
Other expenditure 1200 1400 1400
Sum of cash outflows 16200 7000 7050 6200
Net cash flow (inflow – outflow) 16200 1498487 1715033 1860572