Management Accounting Report: Financial Analysis of Sollatek (UK) Ltd.

This report provides a comprehensive analysis of management accounting practices within Sollatek (UK) Ltd., a private limited company founded in 1983. It delves into various accounting systems, including cost accounting, inventory management, price optimization, and job costing, highlighting their benefits such as improved customer loyalty and effective cost control. The report examines the importance of management accounting, defining key terms and exploring different reporting methods like performance reports, account receivable reports, job cost reports, and inventory management reports. Additionally, it discusses the merits of using planning tools and addresses financial issues, offering potential solutions. The analysis covers various costing methods and emphasizes the role of management accounting in strategic decision-making and financial performance evaluation within the company. The report also analyzes the benefits of using management accounting systems and the different types of reports used in the company. The report concludes with a discussion on the importance of accounting and reporting systems to the management of the company.

Management Accounting

Table of Contents

INTRODUCTION
In the present scenario, it has been found that most of the companies are looking for an
effective system that can provide them valuable ways to record their financial transaction in
proper manner. Management accounting is basically administration of all the accounting related
data are recorded, summarise, communicate and evaluated before posting it into their respective
statements. The primary motive this report is to known about various tools and techniques which
are used by the accountant while analysing the performance of “Sollatek (UK)”. It is private
limited company which is founded in 1983. This project is providing specific information about
various types of accounting and reporting system used by the company in managing their
financial transactions. Use of different costing methods that can help manager of Sollatek to
determine net profit of the company. Merits and demerits of using planning tools are also being
discussed under this report. Certain financial issues and their appropriate ways to resolve those
problems are covered under this project effectively (Carlsson-Wall, Kraus and Lind, 2015).
TASK 1
P1:
Definitions of MA:
Institute of Management Accountants (IMA): Management accounting is a profession
which includes roles and responsibilities performed by the management such as implementation
of plans and policies, preparation of budget, adoption of accounting system etc. It drives an
organisation to achieve its desired goals and objectives within pre-determined time period.
Institute of Certified Management Accountants (CMA): Management accounting is an
integral part of an organisation which supports them in achieving desired goals and objectives
through adopting an effective management system and preparing reports on regular basis (Christ
and Burritt, 2013).
Meaning: Management accounting assist an organisation to achieve competitive
advantage through taking corrective actions and plans in order to maintain financial position in
market. It can be identified through preparing financial reports such as profit & loss a/c, balance
sheet, cash flow statement etc.
In every business organisation, it has been seen that there is need of accounting system
which will assists management in carrying out their functions more efficiently. Any form of
accounting which allow a corporate to be conducted more properly is considered as management
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accounting. It is related with accounting data that can be helpful in future decision making. The
main objective of using management accounting system is to control and manage all their
business transactions that are being done within “Sollatek (UK)”. It has been analysing that
manager uses these system for effective policy that is taken into account for organising regular
functions and activities that are undertaken by the company. It consists of different accounting
methods and tools that clubbed with specific skills and ability to manager organisational
activities. Price optimisation, cost accounting, inventory management system etc. are such
accounting systems which can be adopted by Sollatek (UK) Ltd.. In order to get many
advantages some of which are given as under:
Importance of using MA:
Achievement of loyalty of targeted people: Management accounting systems such as
price optimisation, inventory management system etc. assist Sollatek (UK) Ltd.. in meeting
needs and requirements of targeted people on time through offering quality and safety electrical
products at an affordable prices. This will help in achieving loyalty of customers which directly
enhances the sales and profitability of company (Dillard and Roslender, 2011).
Measurement of performance: It assist management in making an effective decisions
related with investment of funds in execution of different business activities. For example, cost
accounting system help management in preparing budget which decreases the chances of
wastage of funds used in production process.
Effective management control: Management accounting system assist management to
allocate cost to production of individual or group of products. It help in minimising the cost and
wastage due to having sufficient information about the cost incurred in past project activities.
Management accounting systems:
Price optimisation system: Such accounting system help in identifying the actual
perception of targeted people related with the price they willing to pay to company in exchange
of its products and services. Thus, it is considered as effective management accounting system
which assist an organisation to achieve loyalty and retain targeted clients with company for
longer period of time (Johnson, 2013). This will help management in setting up an effective
pricing policy after determining the buying behaviour of its targeted customers. It will further
help company in restricting targeted people not to shift to their rivals products through providing
quality and safety electrical products at an affordable prices. For example, slightly increase in
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price of electrical products on regular basis may bring disinterest among loyal customers to buy
its products and the chances of shifting to their rivals are more. Therefore, such accounting
system assist company to retain loyal customers for longer period of time.
Cost accounting system: Such system assist management in estimating the total expenses
that will be incurred in producing products and services due to which the chances of having
wastage of money during production process are minimum. It is an accounting system which
assist management to prepare budget to execute various business activities such as production or
marketing activities. Sollatek (UK) Ltd.. Is small-sized business having limited amount of funds
due to which it is essential for its management to utilise available resources in an optimum
manner. Therefore, adopting such system will help in giving proper direction to company
regarding investing amount after analysing the future contingencies and profitable area of
business (Maher, Stickney and Weil, 2012).
Inventory management system: It is also one of an effective management accounting
system which assist company in meeting market needs and requirements as soon as possible
through communicating management regarding availability of inventory at present with company
and further stock needed to fulfil the market requirements. Sollatek (UK) Ltd.. Deals in electrical
products whose demand may be increases in near future due to which such accounting system
will help company to ready with the inventory to produce demanded products in more quantity.
Therefore, meeting market needs on time will enhances the brand image of company in market
and the chances of expansion of business are very high. FIFO, LIFO and AVCO are such
methods of inventory management system which are more helpful in determining the current
inventory position of company (Lee and Cobia, 2013). It is further understood under the below:
FIFO: It states that the oldest inventory asset must be sold first. It may inflate or deflate
the actual value of future inventory.
LIFO: It states that the inventory acquired at last will be sold at first. It is most adopted
method applied by company due to minimising the company's tax responsibility in times of
growing inflation (Arroyo, 2012).
AVCO: It is a method that will take the total cost of goods still available for sale and
divide it by the total sum of product form the beginning inventory and purchased.
Job costing system: It is such accounting system which assist management to invest
funds in production of specific individual product or group of products on the basis of their
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profitable outcome received by company in near future. It will help in charging the cost incurred
in producing particular product due to which the management of Sollatek (UK) Ltd.. Compares
the result through differentiating between the cost incurred and profitable outcome received by
selling such product. Batch costing, process costing and contract costing are such methods which
may used under such accounting systems. In the context with Sollatek (UK) Ltd.. The
management may use batch costing due to engaging in electricity equipments (Mistry, Sharma
and Low, 2014).
P2:
Every organisation irrespective of the size whether small, medium or large are required to
record all business transactions which further help management in making an effective decisions
and suitable plans for the betterment of an organisation. Sollatek (UK) Ltd.. is small sized
company which is engaged in providing electrical equipments ensuring their clients about the
safety. Maintaining records of all transactions makes easy for management to identify the
deviations if any, which restricts company to get profitable outcomes (Soin and Collier, 2013). It
can be done through preparing various kinds of reports such as profit & loss a/c, balance sheet,
cash flow statement etc. which shows the cash inflow and cash outflows as well as all
information about transactions made on daily, monthly or yearly basis. Thus, it is essentially
required for Sollatek (UK) Ltd.. To maintain different kind of accounting reports which supports
them to expand its business to a large scale. Such accounting reports includes:
Performance report: Such reports contains all information regarding the performance
level of each departments working for an organisation. For this, the manager of each department
is held liable to maintain records of all transactions and activities performed by them in
achieving desired target. This will assist top authority to prepare budget and assign
responsibilities to their department after analysing their performance level. This will enhances
the overall performance level of all departments due to which the chances of achieving
company's goals and objectives within pre-determined time period are more (Parker, 2012).
Account receivable report: It is such type of reports which communicates management
about the list of paid and unpaid debtors so that the reason of differences in financial statements
are easily identified. Having proper details of unpaid debtors enables management to make some
modifications in their existing credit policies so that the the chances of facing bad-debts by
company will be minimum.
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Job cost report: It is the another accounting report which communicates the profitability
of each product produced by company through comparing it with the cost incurred in delivery
products to targeted clients. It assist management in analysing whether the investment amount in
producing individual or group of products are recovered or not thus the decision of producing
products and services are very much depend on the information collected through such report.
Inventory management report: Such accounting report provides the information about
the level of inventory available with company at present. This will enable management to make
decision regarding ordering stock from suppliers in order to meet needs and requirements of
targeted clients. Sollatek (UK) Ltd.. Is providing electrical equipments to their clients whose
demand can be rises at anytime due to which it is essentially required for company to ready with
the required stock to meet clients requirements. Therefore, inventory management report play an
important role in achieving loyalty of targeted clients (Wickramasinghe and Alawattage, 2012).
M1:
Sollatek (UK) Ltd.. Has received many advantages by using various accounting systems.
It is further understood under the below:
Management accounting systems Benefits
Cost accounting systems It helps in preparing an appropriate budget
which minimises the wastage of cost incurred
in execution of business activities.
Inventory management system It facilitate Sollatek (UK) Ltd.. to know its
actual inventory position at present time which
enables management to decide whether there is
any requirement to place order of stock or not.
Price optimisation system It help in achieving loyalty of customers
through setting an effective pricing policies
after analysing the actual perception regarding
company's pricing policies.
Job costing system It assist management to charge price on
products after analysing the total cost invested
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in producing specific product.
D1:
There are various accounting and reporting system which provides relevant information
about the business transactions to the management for making an effective decisions. For
example, account receivable reports provides relevant information about the unpaid debtors
which enables management to make some modifications in existing credit policies.
TASK 2
P3:
Cost: It refers to the monetary value that an organisation has invested or spend to
produce something required in execution of business functions more effectively. Cost is a
valuation of the efforts, resources, time and utilities, risk etc. which are involved in operating
business activities in order to get profitable outcomes. While calculating net profitability of
company, cost are related with material, labour, overheads etc. in production process. There are
two costing methods which are required to be adopted by the management of Sollatek (UK) Ltd..
Such methods are marginal and absorption costing method (Zainun Tuanmat and Smith, 2011).
Sollatek (UK) Ltd.. is a provider of electrical equipments to different clients such as
businesses, household etc. Due to having limited amount of resources and operating at small
scale, the management of company are required to determine its actual financial position in
market so that further actions will be implemented to achieve high sustainability and
profitability. Thus, to determine net profitability, both absorption and marginal costing are used.
It is further described under the below:
Marginal costing: It is a method which is adopted when an organisation produces extra
unit of output other than main output. Due to this, the cost of production may vary. It includes
variable cost only and ignores fixed costs due to which the net profitability of company increases
thus most preferable method by companies. Such method is also named as variable cost which
consists of labour and material costs in addition with estimated portion of fixed cost.
Absorption costing: It is an effective method which includes both variable as well as
fixed cost due to which the net profitability of company decreased. It is required to Generally
Accepted Accounting Principles (GAAP) external reporting. Due to addition of fixed cost while
calculating net profitability, the net profitability of company lower than the profits calculated by
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using marginal costing thus less preferred by most of the companies (Zimmerman and Yahya-
Zadeh, 2011).
Calculation of net profit by using marginal costing method:
Computation of net income by using absorption costing method:
Break even analysis: It defines the outcomes which can be received by company by
incurring cost and expenses in their business functions. Due to this, the company neither enjoy
profits nor facing any losses.
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Margin of safety: It is more accurate aspects which assist management to value stock of
company at market cost which directly support an organisation to earn huge margin of selling its
products and services.
d. The margin of safety, if 800 products are sold
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
M2:
There are basically two types of accounting techniques which are mentioned under the below:
Standard costing: It is considered as an effective method which help in calculating future
profitability through focusing on elements such as future sales revenue, costs and demand. Such
method is most preferable method due to ascertaining future outcomes.
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Marginal costing: It is adopted by almost every organisations including Sollatek (UK)
Ltd.. As it helps in ascertaining net profits through inclusion of variable cost only.
D2:
Two costing methods are adopted above to calculate net profitability which are
absorption and marginal. According to the above calculation, the manager if using marginal
costing method then the profit is 17500 where as if using absorption costing then the profit is
15675. Such difference of 9600 comes due to inclusion of variable cost. In Break even, total no.
of units sold are 500 and total amount of sales revenue to achieve break even is 20000. To earn
minimum profit of 1000, Sollatek (UK) Ltd.. need to achieve sales revenue of 1333.33. The
safety margin is 37.5 when 800 products are sold.
TASK 3
P4:
Budgetary control is the process of determining the results of various strategies that have
been implemented by the management. Sollatek (UK) Ltd. is a construction company and it has
to plan for the future consequences to reduce the possibility of risk. Budgetary control is used by
the company to make appropriate budgets that help the managers to make good decisions. The
process of budgetary control is very simple but the management have to follow the steps one by
one. It includes distributing responsibilities, preparation of budget manuals, formulation of
budget committee and setting budget objectives and period. Company use various planning tools
in budgetary control. The tools are described below:
Forecasting tools: These tools are used by Sollatek (UK) Ltd. to forecast the factors that
affect the decision making ability of the managers and affect the growth of the organisation.
These tools are used to predict future conditions with the help of past records and current market
situations (Luft and Shields, 2010).
Advantages Disadvantages
It is used to determine the future results for the
company.
It is vary helpful tool for the management
because it provides various information to
the management.
It is not possible to predict actual events for the
future.
Totally based on past records of the company.
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Contingency tools: These tools are used by Sollatek (UK) Ltd. to plan for the future risk
in advance, so it will not harm the manufacturing process and the work will not be affected by
the same. These tools are mainly used to get the idea of unfavourable events that might happen in
future (Vaivio and Sirén, 2010).
Advantages Disadvantages
 It helps to plan for the future risk in
advance.
 Help managers to reserve resources for the
time of uncertainty.
 It require a lot of money to implement and
small company like Sollatek (UK) Ltd. is
not able to use such tools in business.
 It is only helpful when the risk occurs.
Scenario tools: These tools are helpful in forecasting future event that could take place
whether it is favourable or unfavourable. It is also used to evaluate the value of a particular
investment made by the company. Sollatek (UK) Ltd. Ltd. can use this tool to determine the
results of its activities and investments and also help to get the idea of current market trends..
Advantages Disadvantages
 These tools help the management form
future base and long term strategies.
 Provide information of current market
trends to the managers.
 It results only in long term period not
helpful in short term planning.
 It requires a lot of time to result.
M3:
Budget is prepared to execute business activities in more effective and efficient manner.
In order to avoid wastage of funds, the accounting manager is required to adopt various planning
tools such as scenario, contingency tools etc. It help in execution of business activities more
profitably through minimising wastage.
TASK 4
P5:
Every organisation whether small, medium or large are focuses on maintaining their
financial position in market in order to compete with their rivals existing in market for longer
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period of time. For this, the accounting manager is held responsible to record reliable and
accurate informations in the financial statements and verify whether any transactions is missing
in financial records or not. Due to certain circumstances, the company may faces financial issues
such as bad-debts, insolvent debtors, market crisis etc. It can be resolved through adopting
various financial tools which are briefly described as under:
Key Performance Indicators (KPI): It is an effective financial tool which help in
measuring the performance level of employees by comparing it with their past year performance.
It assist management in identifying low as well as high performer employees so that the
deviations found can be easily identified. KPI are classified into two parts which consists
Quantitative and qualitative indicators. Qualitative indicators represents the performance level in
statistical or numerical form whereas the qualitative indicators represents performance level
through analysing quality of employees work. It enables management to make corrective
decision regarding giving rewards and promotion to their employees through using KPI tool
(Budgetary Control, 2017). Application of this tool provides the opportunity to identify the
aspects which creates issues and lowers down the profitability of business. This will help to
remove these resources to improve effectiveness of overall processes.
Financial governance: It is the guidelines formulated by the company for their
employees to perform according to the rules and regulations so that they can work in an ethical
as well as reliable way. This will help the organisation to overcome from the issues through
fulfilment of all the legal rules. As this will not only prevent from penalties but also help to attain
the support of government. (Management Accounting, 2016).
Benchmarking: The overall performance of company depends upon the contribution of
employees therefore it is important for the management of company to set target towards its
employees along with the time frame and accordingly motivate them through providing them
training and development programs. Benchmarks are set regarding the performance of
employees which motivates them to perform their work with perfection for attainment of desires
results,. This will help in removal of issues from performance and help to improve profitability.
(Noreen, Brewer and Garrison, 2014).
Comparison of Sollatek (UK) Ltd.. with other companies
Sollatek (UK) Ltd.. Hichrom Ltd.
It is small-sized organisation which deals in It is large sized organisation which is engaged
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offering electronic equipments to its clients
such as businesses, household customers etc.
in providing variable speed AC drives for
adjustable control of electronic motors and
inverters.
Sollatek Ltd. Is operating at small level due to
which it requires to measure the performance
level of employees so that their contribution
can be maximised towards organisational goals
and objectives.
As Hichrom Ltd. Is operating at global level
due to which it is useful for them to adopt
financial governance as financial tool which
provides suitable guidance to workers about
proper execution of work.
It has wider scope. It has narrow scope.
M4
Management accounting is very important for Sollatek (UK) Ltd. to respond for its
financial problems like shortage of funding, uncertain expenses, credit availability etc. Company
follow key performance indicators for measuring its performance, benchmarking technique for
comparing its business with outsiders and financial governance for tracking its finance records
by these three types of techniques company to deal with financial issues.
D3
Sollatek (UK) Ltd. uses forecasting, scenario and contingency planning tools for
resolving financial problems. Forecasting tool helps in planning strategies effectively,
contingency tool assist in identifying uncertain or unpredictable events which might be occur in
future and scenario planning tool are used for creating long term plans for future growth. Above
tools helps company in determining fluctuation in market that assist in resolving financial
problems before it occurs.
CONCLUSION
It has been concluded from the above project report that management accounting is a
valuable and integral part of an organisation which update them regarding their actual financial
position in market through preparing various financial reports. It includes profit & loss a/c,
balance sheet, cash flow statement etc. For this, accounting manager is responsible to adopt
different management accounting and reporting system so that it can be helpful in making an
effective decisions for the betterment of an organisation. There are different planning tools as
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well such as scenario, contingency tools etc. which help in controlling budget. It directly makes
positive impact on the profitability of company. KPI, Benchmarking and Corporate governance
are also some financial tools which are also required to be considered while resolving financial
issues. In order to determine net profitability of company, the accounting manager have two
methods to calculate such as marginal and absorption costing method.
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REFERENCES
Books and Journals
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