Management Accounting Report: Costing Methods and Planning

This report provides a comprehensive analysis of management accounting principles, focusing on the application of these principles within the context of NERO LTD, a manufacturing company. The report is structured into four key tasks. Task 1 defines management accounting, its essential requirements, and compares it with financial accounting, using examples like cost accounting, price optimization, job costing, and inventory management systems. Task 2 explores different costing methods, including marginal and absorption costing, and examines the preparation and interpretation of income statements. Task 3 delves into various planning tools used for budgetary control, evaluating their advantages and disadvantages. Finally, Task 4 addresses the adoption of management accounting systems to respond to financial problems, comparing different organizational approaches and strategies for achieving sustainable success. The report emphasizes the integration of management accounting and reporting, highlighting their role in achieving organizational goals through effective decision-making and efficient operations.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
P1: Management accounting along with its essential requirements............................................1
P2: Different methods for management accounting reporting....................................................3
M1 Benefits of management accounting system.........................................................................4
D1 Management accounting system and reporting integrated with each other...........................5
TASK 2............................................................................................................................................6
P3: Different costing methods.....................................................................................................6
M2. Management accounting techniques for preparation of financial reporting documents......9
D2. Interpretation of income statements......................................................................................9
TASK 3..........................................................................................................................................10
P4. Advantages and disadvantages of planning tools used for budgetary control:....................10
M3. Uses of various planning tools and their application for preparing and estimating budgets:
....................................................................................................................................................11
TASK 4..........................................................................................................................................12
P5. Adoption of management accounting system to respond the financial problems:..............12
M4. Responding to financial problems, management accounting to sustainable success:........14
D3 Planning tools for accounting period to respond financial problems appropriately:...........14
CONCLUSION..............................................................................................................................14

INTRODUCTION
In any business organisation, there is a requirement to implement a management
accounting system which helps the company in managing its operations effectively and
efficiently. It is also know as cost accounting which assist the company in identifying,
measuring, analysing, interpreting and communicating information to mangers for achieving an
entity's goals. For better understanding of management accounting, company named NERO
LTD is chosen which is operated in manufacturing sector. This report divides in four tasks, first
task explains the term management accounting system and describe its essential types. Second
task describes uses of various appropriate cost accounting techniques for preparation of income
statement. Third task describes the various planning tools used in cost accounting system and its
advantages and disadvantages whereas fourth task provides the comparison between
organisations in adoption of this system and their responses to various financial problems.
P1: Management accounting along with its essential requirements
Management accounting relates with the internal management which considered non-
monetary as well as monetary information that helps to take an effective decision for the
organisation. It plays an crucial by making effective plans that increases the productivity of the
organisation. In these some of effective management accounting system that executed by Nero
Limited as follow:
Cost accounting system- The cost accounting system is implemented by Nero limited to
monitor the cost that is incurred while performing their daily activities. For this they record the
revenue, profits and cost that is record and manage by the organisation. In most of the
organisation finance department adopted this method because it refines the data and turn it into
meaningful information. Like the production cost measures the profitability of the organisation

through recording the data that is managed by them. In context of Nero limited this helps an
organisation to find the production and service cost of the organisation.
Price optimization system- This system helps an organisation to determine the cost or
price of products or services that is offer by them in the market to their customers. Price
optimization system is beneficial for Nero limited because it helps them to ensure the future
profitability for an organisation. Most of the organisation adopt this method for decide the price
of their products that is accepted by its stakeholders such as customer and employees. Along
with this it also helps them to achieve their objective effectively.
Job costing system- This accounting system plays an crucial role in the organisation as it
identify the cost of each unit on individual bases. Job order costing system provide more benefits
to those organisation which provides large number of products to their customers. In the context
of Nero limited finance manager measure or evaluate the cost that is earned by them from each
unit by making the estimation for different cost. Along with this it is also essential for the
organisation to measure their cost for each product or unit which helps them to add the margin
which is useful for organisation to complete their goals with approaching them through positive
forces.
Inventory management system:This system refer to the process that helps an
organisation to complete their goals with maintaining proper inventory. Moreover inventory
management system helps them to monitor regular and current stock that is required by them to
complete their daily activities. It determines that inventory plays an crucial role in the
organisation because mismanagement of inventory creates problems for organisation by
increasing their cost and waste of raw materials. Like Nero limited executed this system in order
to provide fast services to their customers. Along with this it also helps them to gain competitive
edge from their rivals.
Particular Financial accounting Management accounting
Definition Financial accounting refers to that
accounting system which prepare
the financial accounts or statement
for an organisation. The major of
this is to provide essential
Management accounting system
provides relevant information in all
departments of the organisation. It
helps them to develop effective
plans and policy for the

information to interested parties
such as investor, employees etc.
organisation.
Purpose Financial accounts are prepared to
maintain the records of monetary
transaction to evaluate the profits
of organisation.
The major purpose of this is to
gather all the essential information
that is require by the organisation.
Information Financial accounting provides only
monetary information that take
place in the organisation.
Management accounting provides
monetary as well as non- monetary
information to the organisation.
Objective They collect and deliver only
financial information to the
customers or outsiders.
Management accounting assist
management to plan and develop
effective decision making process.
P2: Different methods for management accounting reporting
Budget report- The budget report play an important role in the organisation that helps
them to recognize the difference between their actual cost and the estimated cost that take place
during their operations. Within circumstances of Nero limited it is mandatory to formulate the
budget in order to get the information about their economic condition. In result for this an
organisation recognises their cost level, expenditure level and others factors so it is easy for them
to take effective decisions. In this report the reason behind the fluctuation between their
estimated and actual budget are identify by an organisation. Along with this it also helps them to
control their transaction that creates an unnecessary burden on the organisation through
increasing their expenses.
Account receivable report- The main function of account receivable report is to identify
the number of debtors and creditors that are present in the organisation. In context of Nero
limited it helps them they find out number of debtors so it is easy for them to recover the amount
by formulating new strategies that help to increase their profits. Moreover it is also useful to
make policies by which they reduce the number of creditors as account receivable report helps
them to identify the number of bad-debtors that are present in the organisation. So they are able
to make strict policies for them.

Cost managerial accounting reporting- In this report all the business activities that
impacts on cost of the organisation are included in cost accounting report. Nero limited
formulate this report because it helps them to identify the cost that is impacted in the
organisation. It helps them to identify the difference between the expenses and the income that is
generated by the organisation through selling different products and services in the market.
Moreover it also helps them to reduce their nu-necessary expenses so there is increase in the
profits of the organisation. Further it is essential for organisation to identify cost managerial
aspect because it impact on overall performance of the organisation.
Performance report- Nero limited formulate performance report for their organisation in
order to measure and evaluate the performance of each employee and organisation. The main
purpose of this report is to identify the current performance of the organisation that assist them to
identify different issue that are faced by the organisation to complete their task. Along with this
it is useful for achieving their mission through making effective strategy that is useful from
overcoming different issue. As it helps them to take right decisions to enhance the profitability of
their overall performance.
M1 Benefits of management accounting system
Management accounting system Benefits
Price optimisation system  It is easy for the organisation to decide
the effective price for products that
helps them to attract more customers.
 The another benefit of price
optimisation system is that an
organisation decide the price of their
product that increases sale of it.
Cost accounting system  This system helps the organisation to
calculate their total cost so it is easy for
them to decide the margin that increases
their profits.
 The other benefit of cost system it is

beneficial for organisation to identify
those goals that help to calculate their
cost.
Inventory management system  In this an organisation identify different
needs that is required by customers so
they order essential amount of
inventories to fulfil their needs. This
help them to gain loyal customers for
the organisation.
 It is useful because it helps them to
complete their goals by determining
different factors like they attain their
goals by managing their inventory with
formulating effective strategy.
Job costing system  This system helps an organisation to
identify those goals which exist in
market and helps an organisation to
complete their goals with adding their
margin.
 Another benefits is that it helps an
organisation to keep the track of their
teams and individuals that impact on
the cost control, efficiency which help
to track their regular performance.
D1 Management accounting system and reporting integrated with each other
Both concepts management accounting as well as management reporting both are
integrated with each other because they work for achieving common objective. They both helps
an organisation to achieve their goal within minimum time period. In order to easily understand
an example is mention. It helps them to monitor and control the activities that relates with the

inventory management. Like it helps them to identify that more stock is required by organisation
to identify the required budget. The other example is that to identify those goals that assist an
manager to evaluate their total cost that help to execute their cost effectively in industry. This
conditions are possible only for the organisation when they develop effective budget for the
organisation. As this prices are based on the estimation that are raised in the market or industry.
Therefore management accounting is essential for them because it helps them to complete their
goals with efficiency by keeping regular monitoring on their activities.
TASK 2
P3: Different costing methods
Marginal costing method- This is a kind of method which is related to the preparation
of income statements. In this technique, fixed and variable both the costs are considered
differently. The fixed cost is taken as the cost of period while the variable cost is considered as
the cost of unit.
Absorption costing method- It is a type of costing technique in which fixed and variable costs
are considered in an equal manner. Under this, the fixed cost is taken as the cost of unit same as
variable cost is also considered as the unit cost.
Income statement under absorption costing method for month of May & June
Particulars May June
(in £) (in £)
Total sales 50 15000 25000
Less: Cost of Goods sold
Opening stock
D.L. 5 2500 1900
D.M. 8 4000 3040
Variable production cost 3 1500 1140
Fixed indirect production expenditure 4000 4000
Closing stock -4800 2122.4
Total cost of goods sell 7200 7957.6

G.P. (Gross profit) 7800 17042.4
Selling & Distribution expenses 4000 4000
Administrative cost 2000 2000
Sales commission expenditure 750 1250
N.P. (Net profit) 1050 9792.4
Absorption Cost per unit
Direct labour cost per unit 5 5
Direct material cost per unit 8 8
Variable cost per unit 3 3
Fixed indirect production expenses per unit 8 10.53
Total Absorption Cost per unit 24 26.53
May June
Opening stock - 200
Units produced 500 380
Sold units 300 500
Closing stock 200 80
Income statement under Marginal costing method for month of May & June
Particular May June
(in £) (in £)
Total Sales 50 15000 25000
Less: variable cost
Opening stock - 3200
D.L. 5 2500 1900
D.M. 8 4000 3040
Variable Cost 3 1500 1140

Less: Closing stock -3200 -1280
Total Variable cost 4800 8000
Contribution 10200 17000
Fixed indirect production cost 4000 4000
Selling & Distribution costs 4000 4000
Administrative costs 2000 2000
Sales commission cost 750 1250
N.P. (Net profit) -550 5750
Absorption Cost per unit
Direct Labour cost per unit 5 5
Direct Material cost per unit 8 8
Variable cost per unit 3 3
Marginal Cost per unit 16 16
May June
Opening stock - 200
Produced units 500 380
Sold Units 300 500
Closing stock 200 80
Calculation of material cost variances
As per the given data, three types of material variances calculated which are as follows-
 MCV(Material cost variance) = Standard material cost (SMC) – Actual material cost
(AMC)
 MPV (Material price variance) = (Standard price – Actual price) X actual quantity
purchased and used
 MUV (Material usage variance) = (Standard quantity – Actual quantity) X standard price
As per given data,
Standard Price = £10 per kg

Actual Price = 20900/2200 = £9.5 per kg
Actual quantity = 2200kg
Standard Quantity = 1000kg
MPV = (10-9.5)X2200= £1100 (F)
MUV = (1000-2200)X10 = £ 12000 (A)
MCV = (10X1000)-(2200X9.5) = £10900 (A)
Calculation of closing inventory of material using LIFO and Weighted average method:
Under LIFO(last in first out) method:
Date Purchased Issued Closing stock
Units Units
(in £)
Total
(in £)
Units Units
(in £)
Total(in
£)
Units units(in
£)
Total(in
£)
01/05/1
9
40 3 120
12/05/1
9
20 3.6 72 - - - 40
20
3
3.6
120
72
15/05/1
9
20
16
3.6
3
72
48
24 3 72
20/05/1
9
20 3.75 75 - - - 24
20
3
3.75
72
75
23/05/1
9
- - - 10 3.75 37.5 24
10
3
3.75
72
37.5
27/05/1
9
- - - 10
15
3.75
3
37.5
45
9 3 27
30/05/1
9
- - - 5 3 15 4 3 12
Under Weighted Average method:

Date Purchased Issued Closing stock
Units units(in
£)
Total(in
£)
Units units(in
£)
Total(in
£)
Units units(in
£)
Total(in
£)
01/05/1
9
40 3 120
12/05/1
9
20 3.6 72 - - - 60 3.2 192
15/05/1
9
36 3.2 115.2 24 3.2 76.8
20/05/1
9
20 3.75 75 - - - 44 3.34 147
23/05/1
9
- - - 10 3.34 33.4 34 3.34 113.56
27/05/1
9
- - - 25 3.34 83.5 9 3.34 30.06
30/05/1 - - - 5 3.34 16.7 4 3.34 13.3
M2. Management accounting techniques for preparation of financial reporting documents.
In management accounting system, the marginal and absorption both techniques may be
used by the company in preparation of financial reporting documents. After evaluating the above
problems, it can be said that marginal costing technique is best as compared to absorption
technique.
D2. Interpretation of income statements.
As per the above mentioned income statements it can be interpreted that in the absorption
costing method, company is earning the net profit of £ 1050 in May month. As well as in the
June, they are earning the profit of £ 9792.4 which is more then previous month. On the other
hand, in the absorption costing method, they are getting the net loss of £550 in May month and in
next month they are earning net profit of £5750.