Management Accounting Report: Decision Making, Systems, and Costing

This report provides a comprehensive overview of management accounting, emphasizing its crucial role in organizational decision-making. It begins by highlighting the importance of management accounting in facilitating both short-term and long-term financial decisions, and discusses the use of various accounting systems and reports for internal and external stakeholders. The report then explores the significance of different management accounting systems, including inventory management, job costing, price optimization, and cost accounting, demonstrating how each contributes to effective financial control and operational efficiency. Furthermore, the report details the process of report making, including performance reports, target costing reports, sales reports, movement-based costing reports, accounts receivable reports, and change investigation reports. The report then delves into the income statement preparation using absorption and marginal costing methods, providing detailed examples and comparisons to illustrate the differences and applications of each approach. The provided statements help in financial analysis and decision making.

Management
Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
P1. Importance of management accounting in decision making.................................................1
P2. Report making with an assistance of different systems of accounting.................................2
P3. Income statement with managerial and absorption costing..................................................4
SECTION 2......................................................................................................................................8
P4. Tools used for planning purpose...........................................................................................8
P5. Management accounting systems to respond to financial problems.....................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
With an increase in complexity of business world it has become important that effective
management is maintained so that desired goals can be achieved. Management accounting is a
process through which different reports are prepared in an organisation which helps in taking
various decisions. These are specifically of financial nature which involves different statements
that are used by both internal and external users. It is necessary that enough time is given to the
department which is involved in the process of financial reports so that decision taken on the
basis of these will be accurate and can help enterprise in achieving its goals and targets timely
(Ajibolade, Arowomole and Ojikutu, 2010). In the given report, different tools and techniques
will be discussed which are used to prepare the accounts and also their functioning and role in an
organisation will be highlighted. Different practical solutions will also be given which will help
in understanding the working of absorption and marginal costing in an accounting year.
SECTION 1
P1. Importance of management accounting in decision making
Managerial system and cost accounting is a continuous process which is being followed
in all the organisation in order to make the financial reports. The results of these statements help
in taking long and short term financial decision (Management Accounting, 2017). Through the
process of management accounting data is being transferred into financial terms which act as an
information for the different stakeholders. Various events take place at the work place and in
order to estimate the results of each recording them in books of accounts is necessary which is
done through this process.
Importance of Management Accounting Helps in planning – With the process of management accounting an enterprise can plan
its long and short term goals. Determination of objectives – Through this process vision and route to achieve the set
targets can be better designed. Good services to stakeholders – Information provided by the management accounting
system is of vital use to different stakeholders. They can take their investment decisions
accordingly and can manage its funds in a particular firm (Albelda, 2011).
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 Enables good control – Through this process companies can facilitate effective
controlling culture at the work place. It is because through the financial records results of
different years can be compared with one another and according required corrective
actions can be taken.
Each system has their own significance in the organisation. Distinct tools are used to full
fill distinct purposes. Some of the management accounting systems are discussed below in detail
and also given why they are essential and required in an organisation:
1. Inventory management system – In order to carry out the production process stock is
required in an organisation. For this it is very crucial that management of same is done in
such a manner that effective use of inventory is done so that output can be maximised.
For this purpose level of required quantity of stock needs to be ascertain in advance so
that situation of both excess and deficit can be avoided as both the condition will have
adverse impact on the profitability of an enterprise. Hence, the given method helps in
maintaining the appropriate level of inventory in the organisation (Ward, 2012).
2. Job costing system – To give the end results various jobs are performed in an
organisation. In order to measure the performance of each job it is necessary that
evaluation of each is done separately so that accordingly results can be ascertain. This
system of accounting helps in realising the actual investment required to be made in each
task and also decision regarding discontinuing of a particular job which is not required is
taken with the assistance of this method (Banerjee, 2010). This way total cost also get
reduced.
3. Price optimisation scheme – Cost of any product plays a very significance role in the
choice selection of the customers. Therefore, it is very necessary for an organisation to
set the most suitable price of the commodity which can full fill the requirement of both
consumer and producer. Through this system of accounting it can be calculated that
which price can give maximum benefit to producer without having loss of potential
customers.
4. Cost accounting system – Value of any product involves cost of various steps taken in
the course of action to compete the output. Hence through this system appropriate costing
of each project can be done so that overall control can be kept.
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P2. Report making with an assistance of different systems of accounting
To reach at different conclusions various reports are prepared by the management so that
accordingly planning can be done (Christ and Burritt, 2013). These reports include all the
relevant data which can affect the decision of user. Proper format is followed to make the
document so that user does not face any inconvenience in extracting the required information.
Some of the reports are given below and discussed in detail:
 Performance report – In an organisation evaluation of results is very much required so
that deviations in the required and actual results can be recorded. Through this report the
results of a particular project are presented in a concise form which disclose all the
related data regarding the work done. This further helps in realising that weather the
targets are achieved or not and if not than what are the reasons behind the same (Vaivio,
and Sirén, 2010).
 Target costing report: Under it information about target expenditure will be given. It is
the cost that will be kept up with the goal that the attractive benefits can be accomplished.
This is a standard which is set and as per it the assets will be allotted so that there
optimum utilization can be done. It is noticed that through adopting this method total cost
of operation can be controlled.
 Sales report – It is a document which includes information regarding the sales of a
particular period. It is maintain by the either the sales department or their management. It
involves data regarding the sales volume, cost involved in the process of sales promotion
and what are the changes observed in the total sale of different accounting year. It is
prepared on periodic basis which also assist in evaluating the performance of sales
department.
 Movement based costing report: In this strategy the entire cost will be distinguished on
the premise of the exercises conducted in a financial year. Cost mechanism will be
resolved in connection to the distinctive costs that are acquired and after that they will be
distributed by them (Contrafatto and Burns, 2013). The greater part of the variables to be
thought about in regard of them will be specified in the mentioned report.
 Account receivable report – It is a summary of all the information related to the due
amount which has not yet received or used by the organisation. It helps the collection
department of the organisation to plan their actions regarding invoice which are overdue
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for payments. It shows for how long the amount is being unpaid by the customer record
of which is very crucial.
 Change investigation report: During the conduction of the undertakings there are going
to be few cases in which deviations are going to be observed from the illustration which
were planned. This report will be specified and after that by the utilization of it, the
explanations behind same will be resolved. It will help in going through the problems
confronted by the association and afterwards choices can be made in this context by
which they can work towards minimising the deviations in desired results. The greater
part of the results will be recorded with the goal that they can be utilized in future to take
further decisions (Renz, 2016).
P3. Income statement with managerial and absorption costing
Whenever any production is done it includes various costs and to identify each separately
is very necessary. There are different methods which can be utilised to calculate different cost.
Variety of methods are:
Absorption costing – According to this method cost which incurs in the production of
different units is absorbed against them itself. It shows that the cost of final product is a
summation of all the fixed and variable factor costs for e.g. labour and material value. Hence it is
the reason why is also termed as full costing mode of calculating cost. The main aim of this
method is to recover all the associated cost from the sale of that particular unit. Handling of
various cost varies under this method as it is done keeping production as base.
Marginal costing – Mechanism of this cost is different from that of discussed above.
Change in marginal cost take place with an addition of unit in total production. It consists of
distinct variable costs like the overhead expenses or other sales related expenditure. It can also be
termed as change in the existing opportunity cost due to a unit change in output (DRURY, 2013).
Characteristics of this costing are as follows:
 Helps in price determination
 Does the classification of fixed and variable cost
 Assist in valuation of cost
 Calculate profitDifference between both the discussed costs is given as below:
Marginal costing Absorption costing
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Help of only variable cost is taken in order to
determine the value of inventory.
It uses both fixed as well as variable cost to do
the valuation of product.
P/V ratio is used to determine the profitability
of a particular product type.
Appropriate of fixed cost is done in order to
determine product profitability.
It is used in case of taking short term decisions. This form is utilise when management needs to
take long term judgements.
From the above discussion functioning of each costing method is clear. Therefore, the
income statement can be made using the given knowledge. The below statements will further
help management in taking decisions and development of an enterprise can be assured.
Statement of income and failure using absorption cost accounting
Quarter 1
No. Of units £/unit £ £
Sales value 66.000 1 66.000
less Value of sales
Beginning stock 0 0.85 0
+Manufacturing 78.000 0.85 66.300
-final inventory (12.000) 0.85 (10.200) (56.100)
Gross profit 9.900
less Expenditure
Marketing &Management costs (5.200)
Profit 4.700
-Under absorption (2.800)
Profit reconciled 1.900
Quarter2
No. Of
units
£/unit £ £
Sales value 74.000 1 74.000
less Cost of sales
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Opening inventory 12.000 0.85 10.200
+Production 66.000 0.85 56.100
66.300
-closing inventory (4.000) 0.85 (3.400) (62.900)
Gross profit 11.100
less Expenses
Selling &Administration costs (5.200)
Profit 5.900
Statement of earnings and loss using marginal costing
Quarter 1
No. Of units £/unit £ £
Sales value 66.000 1 66.000
less Cost of sales
Opening inventory 0 0.65 0
+Production 78.000 0.65 50.700
50.700
-closing inventory 12.000 0.65 (7.800) (42.900)
Contribution 23.100
-fixed costs (16.000)
-selling &administration (5.200)
Profit 1900
Quarter 2
No. Of units £/unit £ £
Sales 74.000 1 74.000
less Cost of sales
Opening inventory 12.000 0.65 7.800
+Production 66.000 0.65 42.900
50.700
-closing inventory 4.000 0.65 2.600 (48.100)
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Contribution 25.900
-Fixed costs (1.600)
-selling &administration (5.200)
Profit 4.7
b) Fixed cost is included in different manner in both the cases and hence, the profit deviated in
each case. Prime difference between them are given here under:
For quarter 1
Overheads absorbed = (66.000×£0.20) =13,200
Full fixed cost= 16,000
Below absorption = (2,800)
For quarter 2
Absorbed Expenses = (74000×£0.20) =14,800
Whole rigid expenditure=16.000
Under absorption (1.200)
c) Reconciliation statements - Preparation of this statement is done in order to bring match
between the difference amounts and to reconcile the income earned.
Q1 Q2
Net income below absorption 4.700 5900
(2.800) (1200)
Net profit below marginal 1.900 4700
Practical notes
Fix=16.000
66.000×0.20=13.200
Under absorption (2.800)
74.000×0.20=14.800
Fix=16.000
Under absorption=1.200
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SECTION 2
P4. Tools used for planning purpose
Finance is the most critical resource of an organisation. In order to keep check over it is
very necessary so that the profitability of an enterprise can be maintained. An establishment can
take help of budgeting to keep control over the preparations. It is a process through which
planning for a particular time period is done which is numerical in nature. This provides great
help to organisation in keeping control over its total cash outflow as targets are set against
distinct departments and organisation as whole. It is generally prepared for an accounting year
and at last the set limits are compared against the achieved results (Fullerton, Kennedy and
Widener, 2014). There are variety of budgets which and each serves distinct objectives.
Depending upon the need of departments funds can be classified into different categories master
budget, sales budget, operating, cash and etc. There are different budgets like:
 Operating budget – It is an important tool which limits the maximum range of
expenditure that can be done against different operations. It helps in maintaining overall
cash outflow from the work place.
 Cash flow budget – In order to control the cash inflow and outflow this budget is
prepared.
 Master budget – Is the most complex budget which is made on the basis of all the other
small budgets prepared in an organisation. It helps in estimating the future needs of
finance also.
Each one of them has some positives and negatives too which are given below:
Advantages:
 Assist in planning – As budgets are prepared after doing analysis of cash requirements
of a particular time period it helps in doing planning of future to the management.
Authorises get to know that how much amount will be available for each section which
helps them in planning their expected earnings (Nandan, 2010).
 Develop efficiency – Through the process of budgeting authorises can keep check over
the operations of distinct departments which will further lead to deduction of wastage
cost and hence effectiveness in all the functions performed can be achieved.
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 Good communication – Before any budget is prepared suggestion from those affected
by it are taken. It facilitates good interaction between the authorities of company and
hence, two way communication is established that is a positive indicator of growth.
 Controlling – As budget ensures management by exception it becomes easy for the top
authority to take the corrective actions at the work place. Through the system of
budgeting company can compare the actual work done with that of expected one which
further helps in identifying the week areas of an organisation. This way improvements
can be made which will help in increasing profit margins. Hence this way it becomes an
effective tool to bring culture of control in enterprise (Kotas, 2014).
 Co- ordination – Different department perform their own function but with the concept
of budgeting management can set centralised regulation it the establishment. Committee
which is formulated for designing the budget coordinates the activities of different
sections (purchase, sales advertising etc.).
 Motivation – By setting targets against each departmental head person can be motivated
to achieve those.
 Prediction of cash requirements – Through the process of budgeting company can also
forecast its future requirements of cash and hence can take the required actions in
advance which will help in minimising the effect of uncertainties.
Disadvantages
 Risk of improper estimates – As the budgets are based on predictions it involves great
risk of wrong forecasting.
 Rigidity – Budgets promotes inflexible working surroundings which are not profitable in
case of business surroundings which are dynamic in nature.
 Expensive - As formulation of budgets needs exerts cost of hiring them is high which is
ultimately added to the total cost of company.
P5. Management accounting systems to respond to financial problems
Due to the complexities and wide organisation structure various issues keeps on taking
place in the enterprise. Some of them are related to the difficulty in effective communication as
due to this it becomes difficult to achieve the desired objectives. It is very much necessary that
all the relevant information is communicated on time so that no strategies and policies are
achieved as it is and minimum deviations are observed (Lavia, López and Hiebl, 2014).
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The methods that are associated with it are given underneath:
1. Key execution markers: It is extremely essential that execution should be assessed and
for that the parameters are set which will be required to quantify the level of productivity
gained. The staff will be educated about the objectives that are to be accomplished by
them and it will be their duty to meet it. By this their execution can be analysed.
2. Financial plan: It is one of the most effective tool used to resolve the matter in an
organisation. Through this effective finacial decions are taken by analysing the associated
risk with each option availabe. The way in which issues can be limited will be recognized
and this will be on the grounds that every one of the issues will be resolved on auspicious
premise.
3. Benchmarking: There are different associations which are working so under this
organization will be contrasting itself and the other organization or the business all in all.
By that it will be distinguished that whether the working is as per the accepted procedures
or not. If not then the measures will be taken and best strategies which are available will
be received (Macintosh and Quattrone, 2010).
CONCLUSION
From the given study it is summarised that management accounting is of great
importance for different organisation. It helps management in taking effective and profitable
decisions to the company. Concept of marginal and absorption costing is also descried in a
proper manner which further gives the understanding about how each operates and help in
decision making process. Lastly, the given report concluded with an explanation of budgetary
techniques which shows that how they contribute in efffective utilization of organisation
resources.
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