Management Accounting Report: Financial Performance Analysis - Unit 5

This report, prepared by a trainee management accountant, delves into the core concepts of management accounting, exploring its definition, essential requirements, and various systems. It examines the differences between management and financial accounting, outlining different types of management accounting systems such as job costing, inventory management, price optimization, and cost accounting systems, and their benefits. The report then details different management accounting reports, including budget reports, accounts receivable aging reports, job cost reports, and performance reports. Furthermore, it presents a practical analysis of Digittera Ltd, calculating net profit or loss using both marginal and absorption costing methods. The report also discusses the advantages and disadvantages of various planning tools used for budgetary control and compares ways in which the organization is using management accounting systems to deal with financial problems, concluding with a comprehensive overview of the financial landscape and recommendations for improvement.

Unit 5
Management Accounting
Learners Declaration: I certify that the work
submitted for this unit is my own and the
research sources are fully acknowledged.
Learners Signature: Date:

Table Of Content
INTRODUCTION...........................................................................................................................3
Scenario 1.........................................................................................................................................3
Explaining meaning of management accounting and essential requirement of different MA
systems in the business...........................................................................................................3
P 2 Different methods used for management accounting reports...........................................6
LO 2.................................................................................................................................................7
P 3 Calculation of Net profit or loss under Marginal Costing and Absorption Costing for
Digittera Ltd...........................................................................................................................7
LO 3...............................................................................................................................................14
P4 Explaining advantages and disadvantages of different types of planning tools which can be
used for budgetary control....................................................................................................14
LO 4...............................................................................................................................................16
P5 Comparing ways in which organization is using management accounting system for
dealing with financial problems...........................................................................................16
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Management accounting is a financial term that defines a set of process starting from
analysis of the each financial transaction of the company and ends with development of effective
strategies for the business in order to help the firm in achieving its set goals and objective
(Kaplan and Atkinson, 2015) . In simple terms, the MA can be defined as a process of analysing
and summarising all the financial transactions of the company, evaluation of company's planned
or estimated performance. In addition, the process also includes comparing of actual and planned
performance of the company in order to analysing the efficiency of the business and developing
plans and strategies of the business accordingly so that managers can help the company in
achieving its set goals and objectives. Digittera group is financial consultancy firm based on UK.
It provides financial consultancy services to various businesses relating to manufacturing, retail
industry etc. The present assignment contains a report developed by a trainee management
accountant of the company that explains MA system, MA reporting and their essential
requirement within the business organisation. Furthermore, the study shows use of several
budgetary control tools in order to formulate plans for the company. In addition, the report
contains a practical part that shows preparation of income statements through marginal and
absorption technique of the management accounting. At the end of report, the assignment
includes several MA system that can be adopted by the business in order to improve the
efficiency of company in facing several financial problems.
Scenario 1
Explaining meaning of management accounting and essential requirement of different MA
systems in the business
Management Accounting

"Management accounting is a procedure performed by professional managerial
accountant in order to analyse and summarise different financial performance of the company in
order to collect data relating to financial transactions of the company and summarising and
presenting each information in such a way so that it could help the managers in having a overall
review of overall financial performance of the company (Management Accounting – Meaning,
Advantages & Functions. 2017)."
Origin of management accounting
The system of management accounting was developed by various mass merchants when
the amount of business activities handled by them started increasing day by day. They
formulated their own systems for managing their several business activities in order to manage
each business activity in an effective manner.
Management accounting system
Management accounting system is a part of overall management system of a business
organisation that concerns with performing a range of managerial function for the purpose of
reviewing each financial transaction including various monetary and non monitory activities of
the firm. Further, the system also includes a process of developing more effective strategies,
plans and procedures of the firm in order to improve the efficiency of business in performing
financial activities and enhancing financial position of the company as well.
Difference between management accounting and financial accounting
Both management accounting and financial accounting are different from each other.
Some major difference between these two concepts are as under:
Basis Management Accounting Financial Accounting

Definition Management accounting is the
procedure that deals with
gathering, sorting and
processing financial and non-
financial information in order
to set systems, and prepare
reports of the company. These
reports are being used by the
managers in their decision
making process in context to
choosing the best funds
sources and usage for
accomplishment of business
strategy.
Financial accounting is that
procedure which deals with the
recording and summarising all
the transactions in contxt to the
source and use of economics
resources. Financial managers
use general accepted
accounting principles, and
complying well defined rules
and regulations in order to
record all the financial
transactions of the company
Users This system provides
information to internal users of
company (Ortea and Gallardo,
2015).
Financial accounting provides
information to both internal
and external users of the firm.
Audit Reports of management
accounting is not required to
be audited.
These reports are required to
be adopted by company by
external auditing firms
Different types of MA system

There are various types of MA systems that can be adopted by managers while
performing their business activities in order to improve their quality of managing all the financial
activities of the company and improving its financial position in the competitive market as well.
Effectiveness of these systems can be analysed as under:
 Job costing system : This system of MA system provides process through which
managers can develop their plans regarding helping the company in generating
appropriate amount of profit from the sales. The Job costing system is adopted by
managers of those companies that provides customised product or services to their
customers that costs differently for each product or services. For developing a good job
costing system, an organization must create a system in a way that helps it in identifying
each job from material stage till its delivery.
Benefits:
▪ This system helps in determining cost incurred in production of each unit.
▪ It is required to set the most appropriate price of each product.
▪ It is essential to be adopted to analyse the profit earned in trading of each product.
 Inventory management system: Inventory management refers to monitoring each
movement of stock of firm and development of controlling measures in this regard so as
to eliminate wastage. Inventory management system provides several methods such as
LIFO, FIFO etc. for maintaining record of movement effectively. In addition, it also
provides methods like EOQ method through which managers of Digittera group can
determine actual need of stock and avoid its wastage as well. An inventory management
system of an enterprise is said to be good when it provides for reorder notifications which
will enables a manager in finding out that when the product's stock level declines below
the certain level.

Benefits:
▪ To prevent company from wastage of stock
▪ To analyse minimum requirement of stock in each area of business.
▪ To maintain accurate records regarding volume of stock used by each department.
▪ To eliminate chances of insufficiency of the inventory within firm.
 Price optimisation system: This system of MA helps in setting up the most appropriate
price of the product or services traded by the firm (Smith, 2017). This system enable
managers in analysing the maximum price that can be charged against the product or
services and minimum price below which the company would suffer loss from trading.
With the help of this evaluation, managers of Digittera group becomes able to set the
most economical value of product. Adoption of this system is resulted as good because it
facilitates automation, provides for real time adjustments in the price and also contains
flexible filters.
Benefits:
▪ To attract customers towards the company through economical price of product.
▪ To maintain profitability in the business.
 Cost accounting system: Cost accounting is a part of MA system that provides gudelines
and procedures through which managers can improve the efficiency of company while
performing several business activities. This system is required to be adopted by Digittera
group for avoiding wastage of resources of the firm. This system is said to be ideal as it
provides suitability, comparability and flexibility within the activities of the business.
Benefits
▪ It helps in improving profitability of the business.

▪ With the help of budgetary control method of cost accounting system, the
managers can easily predict requirement of resources within the company in its
near future.
▪ It helps managers in developing more effective controlling measures for cost
controlling procedure.
Characteristics of good information system:
 Relevant- An information attained from application of the management accounting
systems is said to be good as it provides for relevant and useful information to the firm.
 Complete- MAS facilitates the information that comprises if all the facts which helps the
managers in taking effective and suitable decisions.
 Timely- Using MA systems, managers could be able to deliver adequate information at
right time to the right person so that better controlling of activities can be attained.
P 2 Different methods used for management accounting reports
Management Accounting reports are prepared by the managers of the company in order to
know the happenings in the business. The reports help the management in taking certain
decisions related to the profit maximization of Digiterra ltd. The reports are based on the
previous year’s happenings in the company. Various types of reports prepared in the Digiterra
Ltd are
Budget reports
Budget reports are those reports which are prepared to set the targets for the company
which are to be achieved by the management in order to reduce the cost of the company and
increase the profits of Digiterra Ltd (Kaplan, 2015). The budget reports are compared with the
actual performance of the company and if any deviations are found then the relevant actions are
taken in order to reduce the cost of the company.

Accounting Receivable aging reports
Accounting receivable reports shows that in how much time Digiterra Ltd convert its
debtors into the cash for the company. This report helps the company in improving its policy of
converting the debtors into the cash. It also helps the managers in knowing that where the
company is lacking in taking payments from its debtors (Ortea and Gallardo, 2015)..
Job Cost Reports
Job cost Reports are needs to know where the extra cost has been allocated and in which
department company needs more cost to earn more profits for the company. These reports also
help the Digiterra Ltd in knowing the total cost incurred by the company in production of the
goods.
Performance Reports
Performance Reports help the company in knowing the performance of every department
in the company (Avdjiev, and et.al., 2015). It also presents the report of every department where
the extra cost is allocated and which department there is need of more cost in order to earn more
profits for Digiterra Ltd.
LO 2
P 3 Calculation of Net profit or loss under Marginal Costing and Absorption Costing for
Digittera Ltd.
Meaning of cost and different type of costs and cost analysis
Cost can be defined as the total expenses occurred in the production of goods produced
by the company. It is also said as the total expenses absorbed by the company in production of
the goods. Cost is consists of direct expenses and indirect expenses Digiterra Ltd. Direct

expenses are those expenses which are directly related in the production of the goods. Indirect
expenses are those expenses which occurred in the selling of the goods. Cost analysis is the
measure of cost and output relationship of Digiterra Ltd (Namazi, 2016). It can be defined as the
cost incurred is directly related to output of the company.
Cost- Volume Profit can be defined as how Digiterra Ltd measures the change in the cost
and output of the company which affect the net income of the company. Flexible Budgeting is
the budget prepared on the basis of the level of activity of the company. Company’s level of
activity then the expenses of the company also increases. Cost variances means the difference
occurred in the cost of the company when compared actual cost with the budgeted cost of the
company.
On the basis of level of activity cost can be divided in two parts i.e. fixed costs and
Variable costs. Fixed costs are the cost which does not change with the change in the level of the
activity whereas variable costs are the costs which changes with the level of activity in the
company. Cost Allocation can be defined as allocating the different costs to the different
departments according to the needs of costs in the department (Mertzanis, 2016).
Normal costing is the actual performance of the company which is actual cost occurred in
the production of the company. Standard Costing is the set budgets prepared by the company in
order to estimate the cost of Digiterra Ltd. Activity- Based costing is the costing in which costing
is done on the basis of activity in each department in the company. The main role of the costing
is to allocate the costs in every department in Digiterra Ltd.
Marginal Costing and Absorption Costing
Absorption costing and marginal costing are the two techniques of calculating an income
statement for Digiterra Ltd. Under absorption method company takes all the fixed and variable
expenses of the company for valuation of closing inventory. It takes into all the cost which are

absorbed at the time of production of goods (Avdjiev, and et.al., 2015). Under marginal costing
method for the valuation of closing inventory company takes only variable expenses of the
company.
Calculation of income Statement under Marginal Costing system
Computation of cost per unit
Under marginal costing
Particulars Workings Amount (£) Cost per unit
Direst Material 8
Direst Labour 5
Variable O/H 3
Marginal cost per unit 16
Particulars Workings Amount (£) Cost per unit
Selling price 50
-Marginal cost per unit -16
-variable selling price -2.5
Contribution per unit 31.5
Particulars Workings Amount (£) May

Sales (300*50) 15000
Cost of sales:
Opening inventory 0
Material (500*8) 4000
Labour (500*5) 2500
Variable o/h (500*3) 1500
8000
-Closing inventory (200*16) -3200
-4800
10200
-Variable selling cost -750
Contribution 9450
-Fixed costs -10000
Actual Net profit/(Net
Loss) -550
Particulars Workings Amount (£) June
Sales (500*50) 25000
Cost of sales:
Opening inventory (200*16) 3200
Material (380*8) 3040
Labour (380*5) 1900

Variable o/h (380*3) 1140
9280
-Closing inventory (80*16) -1280
-8000
17000
-Variable selling cost -1250
Contribution 15750
-Fixed costs -10000
Actual Net profit/(Net
Loss) 5750
Under Absorption Costing
Particulars Cost per unit
Direst Material 8
Direst Labour 5
Variable O/H 3
Fixed o/h 10
Total absorption cost
per unit 26
Particulars Workings Amount (£) May

sales (300*50) 15000
Cost of sales:
Opening inventory 0
Material (500*8) 4000
Labour (500*5) 2500
Fixed o/h 10000
Variable o/h (500*3) 1500
18000
-Closing inventory (200*26) -5200
-12800
Gross Profit/Loss 2200
-Variable selling cost -750
Actual Net profit/(Net
Loss) 1450
Particulars Workings Amount (£) June
Sales (500*50) 25000
Cost of sales:
Opening inventory (200*26) 5200
Material (380*8) 3040
Labour (380*5) 1900

Fixed o/h 10000
Variable o/h (380*3) 1140
21280
-Closing inventory (80*26) -2080
-19200
Gross Profit/Loss 5800
-Variable selling cost -1250
Actual Net profit/(Net
Loss) 4550
Digiterra Ltd should present the company’s income statement under Absorption costing
because under absorption costing net profits of the company are higher than marginal costing. In
the month of May Company has absorbed over absorption cost because of increase in the fixed
costs absorption. In the month of June there is an under absorption of cost because of units of
closing inventory were less.
Meaning of inventory cost and the valuation methods of inventory
Inventory costs are the total cost which occurs at the time of production of goods in
Digiterra Ltd. Different types of Inventory costs are inventory Purchase costs, inventory
processing costs and inventory distribution costs. Inventory Purchase costs are those cost

incurred at the time of purchasing the inventory of raw materials. Inventory Processing costs are
the work in process occurs when the raw material is converted into finished costs. Inventory
Distribution costs are the costs occurs at the time of selling the goods of the company.
Various types of benefits in reducing the inventory costs are the selling price per unit of
goods decreases which attracts more customers for Digiterra Ltd. Other benefit is that the profit
margin of the company increases which increases the net profit of the company.
Calculation of Material Variances pertaining to the actual and budgeted costs of the raw
material-
Cost variances are the variances occurs when the actual cost of the company are
compared with the budgeted cost of Digiterra Ltd. Company fids any deviations then corrective
actions are taken in order to reduce the cost.
Budgeted Cost at 1 unit Budgeted cost at 1000 units
Material ( in kg) cost per unit (£) Total cost (£)
Material ( in
kg)
cost per unit
(£) Total cost (£)
2 10 20 2000 10 20000
Actual cost at 1000 units
Material ( in
kg)
cost per
unit (£)
Total cost
(£)
2200 9.5 20900

Digiterra Ltd material cost has been increased because of the over absorption of material.
Company has absorbed more units of raw materials for production of 1000 units of the company.
The cost per unit of the company has been decreased but material absorption has been increased
because of which total cost has been increased.
Different valuation method of inventory
Different types of valuation methods are FIFO, LIFO and weighted average method.
FIFO method assumes that all the goods occurred first in the company are sold first by Galway
plc. LIFO method assumes that the last entered goods are sold first. Weighted average method
assumes that all the goods are sold randomly and valuation of inventory is done by calculating
average of all the inventory costs (Tinkelman, 2018).
Overhead costs of Digiterra Ltd are the costs which at the time production of goods and
these costs are needed at the time of converting raw materials into finished goods. These costs
can be fixed overhead and variable overhead.
Calculation of held stock by using LIFO method in the organization
basis
openi
ng
purch
ased sales
balan
ce
Numb
er of
units
per
unit
cost
Total
amou
nt
Numb
er of
units
per
unit
cost
Total
amou
nt
Numb
er of
units
per
unit
cost
Total
amou
nt
Numb
er of
units
per
unit
cost
Total
amou
nt
openi
ng
stock 40 3 120 40 3 120
Total
purcha
20 3.6 72 40 3 120

se
20 3.6 72
issues
in
month 20 3.6 72 24 3 72
16 3 48
Total
purcha
se 20 3.75 75 24 3 72
20 3.75 75
selling
produc
t 10 3.75 37.5 24 3 72
10 3.75 37.5
selling
produc
t 10 3.75 37.5 9 3 27
15 3 45
selling
produ
ct 5 3 15 4 3 12

Digiterra Ltd applies LIFO method for the calculation of closing inventory in the month
of May. LIFO method assumes that the last purchased goods by the company are sold first by the
company. According to this assumption, company calculates the closing inventory at the cost on
which company has purchased the inventory at first.
LO 3
P4 Explaining advantages and disadvantages of different types of planning tools which can be
used for budgetary control
Budget is prepared in order to set the estimate for the company about the future costs of
Digiterra Ltd. Budget costs of the company are the compared with the actual cost of the company
(Chouhan, 2017). These are prepared by the managers in order to know the set targets of the cost
which should be achieved by the company. These help in knowing where the extra cost has been
allocated in the company and eliminate the cost in order to increase the profits for Digiterra Ltd.
Budgetary control is the process where the actual performance of the company is
compared with the budgeted performance of the company. This process helps in cost control and
cost reduction for Digiterra Ltd in order to increase the net profits for the company. These
budgets also help the company in finding the deviations and taking the corrective actions for the
company. Various type of planning tools for budgetary control are as follows-
Incremental Budgeting
Incremental Budgeting is the budget which is prepared on the basis of previous year’s
budget for the preparation of upcoming year’s budget. Previous year budget of Digterra Ltd act
as a base for the preparation of current year budget. There is no fixed formula for preparing the
incremental budgeting (de Campos, 2016). This method of budgetary control can be applied in

the companies where only small changes happen in the company. This budget may not be
innovative and may not be suitable for all the companies.
Advantages Disadvantages
Calculation of incremental budgetary control is
easy and simple to understand.
This method lacks the innovation in Digiterra
Ltd and also there is no cost elimination.
It is easy to implement in the small companies
who are having seldom changes in the
company.
It disconnects the real budgets benchmark
while preparing current year’s budget for the
company.
It helps in building value of equality among
departments which makes the preparation of
budgets simple and easy.
Many employees charge higher expenses in the
budgets in order to spend more on budget
preparation of Digiterra Ltd.
Zero Based Budgeting
Zero Budgeting starts from “Zero Base”. Under this method, Digiterra Ltd management
has to justify each and every expense in the company in order to allocate the expenses in every
department. This method assumes that the each expense should be allocated in the company on
the basis of their need in the department (Oraka, 2016). It does not matter for the company where
the budget prepared for current year is lower or higher than the budget for previous year.
Advantages Disadvantages
It helps in better communication of preparation
of budgets within the departments of Digiterra
Ltd.
It takes a lot of time for the management to
justify each and every expense for Digiterra
Ltd.
It reduces the wasteful resources and control It needs professional to justify each and every

the extra cost allocated in the company. expense for the allocation in each department.
This method is more accurate and simple to
calculate.
It takes a lot of efforts and analysis of every
expense.
Flexible Budgetary Control
This method refers to adjust the changes in the actual revenue levels of Digiterra Ltd.
This method calculated the budget on the basis of production level of activity of the company
(Isaac, 2015). Flexible budgeting control changes according to the change in the level of activity
of Digiterra Ltd.
Advantages Disadvantages
This method provides the logical comparison
between the actual performance and budgeted
performance of Digiterra Ltd.
It does not takes into account many expenses
such inflation rates, interest rates etc.
It is easy to update the budget because only
level of activity changes in the company.
This method generally takes lot variable
expenses and in many companies there are only
fixed expenses.
Digitera Ltd uses incremental budgeting planning tool in order to control cost using
budget because it is easy to calculate and does not need any professional expert to implement
Incremental budgeting method in company. Tesco uses Zero Based Budgeting Method which
takes a lot of time in justifying each and every expense of company so as to allocate every
expense in various department. Unicorn uses flexible based budgetary control in order to control

cost in company. Incremental is the best budgetary planning tool because it is less expensive and
also easy to implement in company.
LO 4
P5 Comparing ways in which organization is using management accounting system for dealing
with financial problems
There are various several issues related to the monetary problems used by business units for
assessment of these monetary issues. These can be assessed by using various techniques
such as Benchmarking, KPI’s, variance analysis, Balanced Scorecard, Financial
Governance. These techniques are as follows-
Benchmarking
Benchmarking is the technique where Digiterra Ltd sets the benchmark related to
incomes and revenues with the other competitors of the company. This benchmark technique
helps the management in achieving the set targets for competing with the other companies in
the market.
Advantages of benchmarking are-
 This method is helpful in assisting the new paradigms for Digiterra Ltd.
 It contributes in improving the performance of the company by enhancing
competitiveness (Duan, and et.al., 2016).
Disadvantages of benchmarking are-
 This technique adversely affects the employee motivation of Digiterra Ltd.
 It is not realistic basis of performance measurement.
Variance Analysis

Variance Analysis is done by comparing actual performance of Digiterra Ltd against the
predetermined business unit where improvement is required (Pilleboue, and et.al 2015). It
clearly exhibits the reason of deviations and what are the possible corrective actions to be
taken by Digiterra Ltd.
Advantages of variance analysis are-
 This technique helps in assisting the responsibility of each centre or department of
Digiterra Ltd.
 It helps in taking the remedial action on the accurate time by the company.
Disadvantages of variance analysis are-
 In case of unrealistic standards variance analysis offers unreliable framework for
decision making.
Key Performance Indicators (KPI’s)
Key Performance Indicators is the technique where Digiterra Ltd uses every key element
such as sales, profit, cost etc. in comparison of performance. Along with the key indicators, it
also assists the deficiencies in the company to help the company in achieving their set targets for
competing the other companies in the market.
Advantages of Key Performance Indicators are-
 This technique helps in developing competitive position in the market (Parmenter,
2015).
 It offers the input for setting competent policies against the company’s competitors.
Disadvantages of Key Performance Indicators are-
The technique negatively affects employee motivation and commitment.
This method judges on the basis of subjectivity rather than objective for Digiterra Ltd.
Balanced Scorecard

Balanced Scorecard helps in measuring and evaluating performance from four
perspectives such as financial, customer, internal process and organisational capacity
(Akkermans, 2018). It takes into consideration customers, staff, and organisation for
evaluating purpose of Digiterra Ltd.
Advantages of Balanced Scorecard are-
 It facilitates alignment between companies’ strategies and tasks.
 This technique also ensures sustainable organisational by focussing on financial and non-
financial aspects.
Disadvantages of Balanced Scorecard are-
 It is very difficult in Digiterra ltd and takes a lot of time in implementing the technique in
the company.
Digiterra Ltd should use the benchmarking for the purpose of solving the issues related to
the monetary issues or financial issues of the company. Tesco Ltd uses Balanced Scorecard for
solving the issues of company related to finance. Unicorn uses KPI's for solving the financial
problems in company. KPI's uses only elements of company and does not compare whole
income statement or profit or loss statement which is lacking point in KPI's. Benchmarking is the
better way of solving financial issues because it brings the competition in the company by setting
various targets for the company.
CONCLUSION
By summarizing the report, it consists of various aspects for Digiterra Ltd such as cost
and different types cost, inventory costs, valuation methods, cost variances and valuation method
of inventory used by the company (Management Accounting – Meaning, Advantages &

Functions. 2017). It also covers the managerial reports prepared by the management in order to
take certain decisions for the company. In the above techniques of solving financial issues,
Digiterra Ltd is using benchmarking technique which is better than the other techniques of
solving financial issues for the company.

REFERENCES
Books and journals
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University working paper.
Chouhan, V., Soral, G. and Chandra, B., 2017. Activity based costing model for inventory
valuation. Management Science Letters. 7(3). pp.135-144.
de Campos, C. M. P. and Rodrigues, L. L., 2016. Budgeting Techniques: Incremental Based,
Performance Based, Activity Based, Zero Based, and Priority Based. Global
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