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
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submitted for this unit is my own and the
research sources are fully acknowledged.
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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