Analysis of Management Accounting Systems and Costing Methods Report

This report delves into the realm of management accounting, offering a comprehensive analysis tailored for Agmet Metals. It begins with an introduction to management accounting, emphasizing its role in financial data analysis and its significance in guiding business decisions. The report then explores various management accounting systems, including cost accounting and inventory management, highlighting their requirements and benefits. Furthermore, it examines different reporting methods such as cash flow analysis, fund flow analysis, financial planning, ratio analysis, and operating budget reports, providing insights into their applications within an organization. The report also covers topics like bills receivable reports and performance reports, essential for evaluating departmental performance. Throughout, the report underscores the importance of these tools in enhancing decision-making, cost reduction, and overall business strategy, making it a valuable resource for understanding and implementing effective management accounting practices.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Explanation of management accounting and requirements of different types of
management accounting systems...........................................................................................3
P2 Explanation of different methods used for management accounting reporting................5
TASK.2 ...........................................................................................................................................7
P.3 Computation of net profit using absorption costing and marginal costing techniques....7
TASK.3..........................................................................................................................................11
P.4 Similarities and dissimilarities of different types of planning tools used for budgetary
control:..................................................................................................................................11
TASK.4..........................................................................................................................................13
P.5 Management accounting systems to respond to financial problems:.............................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is a method which used in the financial data and also to give an
advise for the user company to develop their business activities (Lukka and Modell, 2010). This
is an accounting systems which can help to the company to make a better business activities as
per this accounting system. Organisation have to use this accounting method which can help to
them to collect and analyse the data related to the financial and operational activities of the
business. Management accounting reports are based on the management related data and it is
having focus to improve their managerial decisions which can help to the company to reduce
their internal cost. It has a potential top provide an appropriate data which can be used by the
organisation management to make a better decision and planning. Management accounting is
having an important role in the organisation which can help to the company to make a better
planning and staffing of the employees by which they can make a better position in the targetted
market. This present report is based on the Agmet working in the manufacturing in chemical
manufacturing industry (Luft and Shields, 2010). The below mentioned report is having different
types of management accounting system, different methods to use it the organisation and
advantage and disadvantages of the management accounting system.
TASK 1
P1 Explanation of management accounting and requirements of different types of management
accounting systems

To,
General Manager,
Agmet Metals,
Subject: A report to general manager for management accounting systems and suggesting to
adopt suitable costing techniques for the company. This report will provide details upon
different costing methods and please select a best one for the organisation according to you.
As Agmet is working in the manufacturing industry it is having a huge need of
management accounting systems which can help to the company to deal better with the
situations. Management accounting is a combination of the accounting, finance and
management data to enhance the potentials of the organisation to make a better decisions for the
work force. Simply it is a concept which works on the financial and non financial data which
can help to the company to make a better position in the targeted market. Managers which are
working in the organisation has to use management accounting system by which they can
increase their decision making abilities which are related to the employees and staffing. It help
to the company to make a better strategy and as well as to implement and formulate these
strategies in to the management (Lee, 2011). Basically management accounting systems works
on the work force by which company can make a better work adjustments as per the targets of
the company. As the Agmet is using the management accounting system bin their internal
management which help to them to make a better staffing of the employees to increase the
production and as well as productivity of the people working in the organisation. But it has a
huge need of the data related to the production, performance and finance to make adjustment
according to the target of the company in the management (Kaplan and Atkinson, 2015).
Centralise data can help to the management to make best solutions on the problems which they
are facing in the internal organisation. Management accounting is having different accounting
system which can help to the company to make better strategies:
Cost accounting system: It is an accounting system which works on the cost of the raw
materials, production process and inventory which they can have in the company. It can help to
the company to make a record of the particular factors which are having a significant
investment of the financial sources and as well as it help to the company to make a proper
pricing of the products which they are selling in the market (Jansen, 2011). As the Agmet is
working in the chemical manufacturing so they have to use this system in the company to make

a proper analysis of the different stages of the process to reduce the cost of the products and
increase their profitability in the production. This accounting system is having requirement of
the data related to the cost of each of the production level and as well as variable overheads
which has to counted in the pricing of the products.
Inventory management: It is an essential management system which is normally used by the
manufacturing and retailer companies to manage their stock level and inventory. It is
controllable by the computer software which help to the company to make a proper
management of the products which they are having in the stock(Talha, Raja and Seetharaman,
2010). It can support to the Agment to make a management in the stock, which stock has to be
sale in to the market and as well as to manage the stock level in the inventory to reduce the
contingencies and risk of the lack of stock for future needs (Hiebl, 2014). This accounting
system is having need of the details of the stock which can help to the company to make
adjustments in the production as per the market demands and accomplish to supply in the
market.
These accounting system can help to the company to price optimization which can help
to the company to make more profits and as well as they can reduce their prices which can
make a positive impact on their sales of the products in to the targeted market.
P2 Explanation of different methods used for management accounting reporting
Management accounting report is a detailed data sheet which explains the sources of
informations which can help to the company to run business in smoother manner. It is a business
document which shows that company is working in profits and loss. Agmet has to use
management accounting reports by which they can make a better decisions about unused units
which are creating a financial pressure on the organisation. Agmet can make it's management
accounting reports on quarterly basis which can help to them to show their status and also
explain participation of different departments in the success of business. Company can make
these kind of reports in the middle level of management because they are having a direct report
from their subordinates managers by their computerized reporting system.
Each and every organisation gas made management accounting reports which help to
them to evaluate their own performance in the targeted market and as well as it supports to them
to make adjustments in to their business activities. These reports are made by the organisation on

the basis of the different time durations like; daily, weekly, monthly, quarterly and yearly to
make an analysis of the management, accounting and financial data of the company. Different
types of management accounting reports are here which can be used by the Agmet:
Cash Flow analysis: This is a statement in which cash transactions covered, it is divided in to
three sections which are operating activity, investing activity, financial activity. In these section
of the cash flow statement Agmet has to analyse the cash inflow and cash outflow from the
business (Håkansson, Kraus and Lind, 2010). As the company is working in the chemical
manufacturing and selling so product sale has to be covered in to the operating activities and
return on the investment has to be covered in to the investing and cash inflow and outflow from
the financial sources covered in to the last one.
Fund flow analysis: It is used by the management of the Agmet by which they can make better
working in the organisation by analysing the use of funds which are available for them. It help to
the company to make an analysis of the sources where they can arise financial funds and as well
as it can help to the company to make an appropriate analysis of the points in which they are
investing their financial funds. It can help to the company to make a profitability level in to the
organisation by making a proper analysis of these sources and consumption of the finance.
Financial planning: It is an essential tool for the managers of the Agmet to make proper
planning of the investment and as well as arise finance for the future project. So the Agmet has
to use methods which are given under the management accounting system(Shah, Malik and
Malik, 2011). It can help to the company to select an appropriate source of finance for their
future projects which can help to the company to make a profitability in the investments and as
well as it can help to the company to determine the best source (Herbert and Seal, 2012).
Managers and owners of the Agmet have to use this method which can help to them to select a
source which has a potential to give them proper financial support till to attain their objectives.
So they have to make a proper analysis of the available options of the financial sources and it can
help to the company to make a favourable decision on it.
Ratio analysis: It is based on the mathematical formulas which can help to the company to make
a proper analysis of the profits as per their investments and expenses (Fullerton, Kennedy and
Widener, 2014). Standard ratios has to be used by the company to make a review on the
production cost and pricing.

Operating Budget Report: Each and every organisation has made a budget which includes all of
the factors on which a company work in a year (Dillard and Roslender, 2011). So Agmet has to
use the budget report by which they can minimise the cost and expenses and as well as they can
manage profitability in the organisation. Agmet has to make annual operating budget on annual
basis which can help to the company to estimate their operating cost for the year and determine
the selling price of their products. An operating budget report can help to the company to make a
better change in the company by which they can be in the profitable conditions. This can help to
the company to analyse those sources which are not working according to expectations and
consuming over cost on the basis of estimated cost.
Bills receivable reports - It is that document in which information related to the amount which
is due to customers but not received is included. This is an important document as in order to
assist the collection department it is necessary that data is properly recorded.
Performance report – It is another text in which results of different department are included
which helps on doing the evaluation of each. Through this it becomes easy to understand that
which section of the department needs to be improved and given more care. Mainly performance
report is created to analyse the performance of a project or employees of organisation, in the
context of Agmet, it will be effective to use this to measure the performance of employees which
is essential. It can help to the company to maintain a standardized productivity of workers. The
performance reports having some essential elements in it which are investment, standardize
output from an employee and actual performance of employee. Management of Agmet can draft
these reports on monthly basis to evaluate the productivity of each employees which can help to
the company to be in profitable situations.
Inventory management report – It includes the information related to the present stock level of
the company which is of great importance. By this report both the situation of excess or deficit in
inventory can be avoided. As company is dealing in the chemical manufacturing industry so it is
having a huge need of the inventory management because it can help to the purchase team to buy
enough raw material to convert it in chemical. It is essential that production of chemical has to be
appropriate according to market demands which can help to the company to be in the profitable
situation. By using inventory management company will able to maintain an enough stock which
can help to them invest in profitable manner.

These all of the methods has to be used by the Agmet to manage their financial resources
to attain their objectives with maximum profitability.
TASK.2
P.3 Computation of net profit using absorption costing and marginal costing techniques
Net profits can be figured out through different procedures in the management
accounting. Income according to the absorption costing and marginal costing is appeared as
underneath:
• Absorption Costing: This costing methodology is a system of management accounting by
which different costs which are connected with various sorts of production procedures are
absorbed on an item(Setthasakko, 2010). Absorption costing is required to assess the stock
of an association. Budgetary forecasting is the principle component of management
accounting(Sánchez-Rodríguez and Spraakman, 2012).
.
Income Statement as per absorption costing :
Selling price £35
Unit costs
Direct materials £6
Direct Labour £5
Variable Production overhead £2
Variable sales overhead £1
Budgeted production for the period is 600 units
Fixed costs for the month are given below
Budgeted cost Actual cost
Production overhead £1,800 £2,000
Administration cost £800 £700
Selling cost £400 £600
Absorption costing
Working 1: Calculate full production cost
Direct material £6

Direct labour £5
Variable cost £3
Fixed cost £5
Total £19
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*19 = £1900
NET INCOME AS PER ABSORPTION
COSTING:
Sales (35*600) 21000
less:
Cost of Production 9600
Gross Profit 11400
LESS:
Fixed and variable cost:
variable sales overheads (600*1) 600
Admin & selling cost (700+600) 1300
less;over absorbed fixed production overheads -100 -1800
NET INCOME AS PER ABSORPTION
COSTING: 9600
 Marginal Costing: Marginal costing is extremely useful in administrative decision
making process. Administration's production and cost and trade decisions might be
effortlessly influenced from marginal costing(Renz, 2016). That is why, this is a part of
cost control technique for costing. Before clarifying the utilization of marginal costing in
administrative decision making process, marginal costing is computed as change in the
total cost due to change in the sales. Basically, this is the tool which is used for
displaying the effect on net profits if accountant categorised total cost in variable and
fixed cost. Marginal cost is always equal to the variable cost or cost of sales. Marginal
costing methodology are applicable for firm internal decision making in a short

run(Quinn, 2011). Marginal costing is the cost which is incurred on producing that extra
unit.
Income statement as per marginal costing :
Working 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production o/h 3
Variable production cost 14
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Net income as per marginal costing:
Sales (35*600) 21000
less:
Cost of Production (6+5+2) -9100
closing stock (100*13) -1300
variable cost -7800
Contribution 13200
less:
variable sales overheads (600*1) -600
fixed overheads -2000
Admin & selling cost (700+600) -1300
-3900
NET INCOME AS PER MARGINAL COST 9300
Difference between absorption and marginal costing techniques :

Basis for
Comparison Marginal Costing Absorption Costing
Meaning
Under marginal costing, decision
making tool for identifying the
total cost of production.
Under absorption costing, apportionment of
total costs to the cost center so that the firm
could identify the total cost of production.
Cost Recognition
The variable cost is treated as
product cost. On the other hand,
fixed cost is considered as period
costs.
Under absorption costing, fixed and
variable cost is considered as product cost.
Classification of
Overheads Fixed and Variable Production, Administration and Selling &
Distribution
Profitability Profitability is calculated through
Profit Volume Ratio.
Due to addition of fixed cost, profitability
gets affected.
Cost per unit
Deviation in the opening and
closing inventory does not impact
on per unit cost.
Deviation in the opening and closing
inventory influence the cost per unit.
Highlights Contribution per unit Net Profit per unit
Cost data Presented to outline total
contribution of each product. Presented in conventional manner
 Cost Volume Profit Analysis(CVP Analysis) : This is a methodology which is utilized by
the organisation for knowing the impact of very in cost of product and its volume on
Agmet's operating income and net income. Agmet is required to design an assumption
where selling price will remain stable during course of operation(Pipan and Czarniawska,
2010). Accuracy of CVP analysis based on the fact that company’s cost of production is
fixed at a fixed period of time. In the said period actual production overhead,
administration cost and selling cost is higher than the budgeted cost, as aggregately
budgeted total cost of these three component was £ 2600 but actual cost is £ 3300.

 Absorption Costing : As per the above mentioned income statement which is made as
per absorption costing. Total cost per unit of Agmet was £ 19 which includes £ 6 for
direct material, £ 5 for direct labour, £ 3 is for variable cost and £ 5 of fixed cost
apportioned on specific basis. Under absorption costing, Agmet search out under and
over absorbed production overhead in order to attain better cost management (Nandan,
2010).
TASK.3
P.4 Similarities and dissimilarities of different types of planning tools used for budgetary
control:
Budgetary control is utilized as a device of administration control and determines a few
advantages. As the company is committed in manufacturing, it is essential for it to make a
budgetary control on the activities conducted in to the manufacturing. Higher management of the
Agmet has to develop different types of budget e.g. master budget, operating budget,
departmental budget, purchase budget etc. These can help to managers of the company to
maintain to cost of their operations according to the budget. It can also help to the company to
analyse the factors where company has put more investment of resources according to estimated
budget. So Agmet has to develop these different types of budget which can help to them to be in
the Win position in their industry by creating profits. There are few budgetary tools which are
mentioned hereunder:
Cash budget: Under cash budget, entire expenses or revenues related to cash considered. With
the help of cash budget, company is able to allocate its earnings in a most effective manner and
also able to plan effectively.
Advantages –
 Estimation of future needs: It can help to the company to make an estimate of the future
needs of cash. This will help to the company to gather informations of those expenses
which are related to the future of the organisation, so it can help to the company to
manage their liquidity to bear these expenses.
 Control cash flow: It can help to the company to manage their cash inflow and outflow
to deal with the stakeholders. Agmet is having debtors and creditors, each one is having