Management Accounting Report: Strategies for ABC Ltd

This report provides a comprehensive analysis of management accounting principles and their application within ABC Ltd, a drug manufacturing company. It explores the core concepts of management accounting, differentiating it from financial accounting and highlighting its role in providing relevant financial and non-financial information for internal decision-making. The report delves into various management accounting systems, including inventory management, job costing, cost accounting, and price optimization, emphasizing their significance in controlling costs and enhancing profitability. Furthermore, it examines key management accounting reports such as job costing, performance, variable analysis, inventory control, and budgets, illustrating their utility in performance evaluation and strategic planning. The report also discusses marginal and absorption costing methods for income statement preparation and concludes by emphasizing the benefits of management accounting systems in achieving organizational objectives and aiding managerial decision-making.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK. 1...........................................................................................................................................1
P1.................................................................................................................................................1
P2 ................................................................................................................................................3
M1 ..............................................................................................................................................4
D1................................................................................................................................................4
TASK 2............................................................................................................................................4
P3.................................................................................................................................................4
M2...............................................................................................................................................7
D2................................................................................................................................................8
TASK 3............................................................................................................................................8
P4.................................................................................................................................................8
M3: ...........................................................................................................................................10
P5: ............................................................................................................................................10
M4: ...........................................................................................................................................11
D3:.............................................................................................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13
Books and Journals...................................................................................................................13

INTRODUCTION
Management accounting is the main tool which is used in the sourcing, analysis,
communication and implementing the financial and non financial information regarding
decisions. Each organisation attempting to gain the competitive advantages over the others rivals.
MA is also known as the cost accounting, and this is applicable usually on the manufacturing
companies (Otley and Emmanuel, 2013). ABC Ltd is the drug manufacturing company which
opt the management accounting system in order to attain the maximum output so that the per- set
objectives could attain. However, the managers of the cited firm are being assisted to have the
relevant information in order to have the business sustainable. Management accounting does not
only concern to the finance related information but also need to gather information overall.
Managers build their policy as per their business need and respond accordingly. However, there
are so many methods in the management accounting, but there is need to attain the pre- set
objectives of the organisation (Tucker and Lowe, 2014).
TASK. 1
P1
Management accounting is the process of defining entire accounting system of a
company that means it covers entire financial issues. MA refers to making overall accounting
reports to manage and control the future related cost (Morales and Lambert, 2013). MA reflects
an adequate report that act as an effective and useful tool during planning period or to forecast
the estimated sales. As managing accounting refers to controlling entire monetary terms in an
adequate manner through minimising their losses via taking accurate estimation. While, on the
other hands, management accounting is to manage the additional cost via using the balance sheet
so that the company needs to aware about their available assets and liability (Otley and
Emmanuel, 2013). In this various processes will be required to be undertaken by the company
which will be including identification, interpretation, and analysation of the data. The managers
will be able to make the best decisions with the help of the information that will be collected in
all these processes (Macintosh and Quattrone, 2010). There is vast difference between
management and financial accounting. As in this the data that is collected is used by the
company only and it will not be provided to the outside parties. There are various systems that
can be used by ABC and some of them are:
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 Inventory management system: Inventory is required in all the production processes
that are undertaken and for that various decisions are required to be made so that it can be
managed in the most appropriate manner. It will be required that the quantity of the stock
that is required to be maintained should be identified so that the the level which should be
ordered should be calculated and by that the units that will be ordered will be such by
which the problem of the shortage will be solved (Lukka and Modell, 2010). The cost
that is incurred in storage of the excess inventory will also be saved by the company and
by this the overall cost of the company will be reduced which will lead to increase in its
profits.
 Job costing system: In any process there are different jobs that are performed so that the
final product can be achieved and on them there will many expenses that will be
involved. It is not possible for the company to calculate the per unit cost on the basis of
each job so it is adopted by them that all the cost that will be incurred should be added
and then they will be allocated to different units and activities. For this it will be needed
that the cost should be divided by the units so that per unit cost can be calculated.
 Cost accounting system: This is one of the most important system in which the work
that is to be carried out is divided into various parts (Lukka and Modell, 2010). There are
in all five parts that will be undertaken among which firstly the measurement of the
inputs that will be used in the process will be required to be done. Secondly various
methods that are available will be used in the valuation of the inventory. In the next part
accumulation of all the expenses will be done and the assumptions that are to be made so
that cash flow can be analysed and lastly the periodic methods will have to be used so
that all the capabilities can be recorded properly which will be helpful for the company.
 Price optimisation system: The main motive of any business is to earn more and more
profits and for that it will be required that most profitable price should be charged from
the customers. But in this it should also be taken care off that the price should be such
that will be affordable for the consumers (Luft and Shields, 2010). This is required as
there is great relation between the price and demand as if the price is increased then the
demand will be reduced as all the customers are not willing to pay the high price for the
product so the demand will be affected. So various methods that are available for the
valuation of price will be used and best price will be selected.
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P2
In an organisation there are various reports that should be prepared a part from the
statements that are made. Some of the commonly made reports are described here under:
1. Job costing report: In the production process that is carried out by the company there
are various jobs that are required to be conducted which includes many costs that will be
incurred. Some of the costs will be the material, labour and expenses. All the cost that
will be incurred in relation to various activities will be aggregated (Kotas, 2014). The
cost of all the jobs that are done will be calculated at last after the accumulation is
completed. By this the company will be able to determine the manner in which the
allocation will be required to be done by them so that the total cost can be distributed
among all the products in appropriate manner. ABC limited will be able to control the
profits of the company as it will have all the information in relation to the cost and by this
proper selling price will be decided.
2. Performance report: The performance of the company is required to be evaluated on the
regular basis and for this performance report will be made. For the preparation of it
variances will be needed to be calculated and that will be possible only when the
company will be having the actual and the budgeted information. With the help of it they
will be compared and deviation will be calculated. On the basis of them the budget for
the future period will be made. The corrective actions will be taken on the basis of the
finding made with the help of this report.
3. Variable analysis report: In the production there are various cost that are done and in
this there are two types of cost which are fixed and variable. In this report variable aspect
will be required to be recorded. These are those cost which change with the change in the
production units (Kaplan and Atkinson, 2015). Even if there is a change of unit the cost
will also fluctuate. This report will be prepared as the profit will be affecting to a great
extent by this so it will be evaluated by the company by using it.
4. Inventory control reports: Inventory is the most important thing for the production of
any product and it is required that it should be managed in the most appropriate manner.
For this the proper system will be established by which the level that is to be maintained
will be identified and all the findings will be recorded in a report that will be known as
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inventory report. By this company will be able to know the ordering level and the
problem of shortage that is faced will be solved and organisation will be able to avoid the
loss that happens due to this. Also the cash that is blocked in the stock which remains
lying unnecessarily will be saved and company can use it for any other purpose.
5. Budget: These are reports that are to be made by all as with the help of this the company
will be able to find out the variances (Herzig and et. al., 2012). These are prepared on the
basis of the historical data and also the projections in relation to future will be taken into
consideration. Then they will be compared with the actual performance and by that
deviations will e found which will help the company in evaluating the performance. It
will be needed that the targets that are set should be achieved and the company will be
able to reduce the cost and increase the profits with the help of them.
M1
Management accounting systems are used by the company as there are various benefits
that will be achieved with the help of them. It will help the managers of the company to make the
most appropriate decisions and they will be used so that targets and the objectives of the
company are fulfilled. Also with the use of these systems the irrelevant cost will be identified
and eliminated so that the cost of the product can be reduced and earnings will be increased.
D1
In an organisation it is very important that all the reports should be maintained in proper
form so that they can be used for the various purposes and for that it will be needed that the data
is required to be entered should be collected (Fullerton, Kennedy and Widener, 2013). For this
the systems of accounting will be used and by which the relevant information will be obtained.
The reports can never be made without the help of accounting systems so it can be said that they
both are very important for ABC Ltd.
TASK 2
P3
For the preparation of income statement it is needed that the cost should be calculated
and for that mainly there are two methods that will be used which are marginal and absorption
costing and there are described here under:
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Marginal costing: This is the method in which the variable cost that have been incurred in
relation to any product will be taken into consideration. These are those cost which will change
with even an unit change in the number of units that are manufactured (DRURY, 2013). They
will be including the direct cost that are applied in respect of material, labour and some other
direct expenses. The profits that are to be made are greatly affected by this as it is having direct
connection with the cost. The contribution of a unit will be calculated by deducting all the
variable cost from the sales price and then after that all the fixed cost will be deducted so that
final profit that has been earned will be achieved.
Absorption costing: In this method both the variable and the fixed cost will be included in the
calculation of the profit. For this the fixed cost will be allocated among the total units that will be
manufactured. By this the cost will be calculated at per unit basis and then it will be multiplied
by the units to calculate the total amount. The total cost that will be present will be deducted
from the sales figure and the net profit will be derived with the help of it (Cuganesan, Dunford
and Palmer, 2012). For the allocation of cost there are various methods that can be used in this
and the main method that is used is the activity based costing. In this the cost drivers will be
found and then the cost will be distributed on the basis of them. As the cost will be allocated so
the under and over absorption that is incurred will also be taken into consideration while
calculating the profits.
Both the methods are different from each other in various forms and that are explained
with the help of the comparison chart here under:
Basis Absorption costing Marginal costing
Meaning In this cost centres are used
among which the total cost
will be divided and the cost of
the product will be ascertained.
This is the method with the
help of which the total cost
will be ascertained that will be
used in the decision making
process.
Classification of overheads The main heads under which
overheads are classified are
production, administration,
selling and distribution
Here there are only two
categories in which expenses
are categorised and they are
fixed and variable.
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overheads.
Unit cost The variation in opening and
closing stock will have impact
on the unit cost of the product.
Difference in opening and
closing stock will not have any
effect on cost per unit.
Profitability Fixed cost is considered in
calculation of profit so they
will be affected by that.
In order to calculate the
profitability profit volume
ratio will be considered.
Income statement as per Marginal costing
Particulars Amount
Sales (35*600)
Less:
Cost of Production (6+5+2)
Variable overhead (600*1)
Closing stock (100*13)
Variable cost
Contribution
Less:
Fixed expenses
Admin & selling cost (700+600)
21000
-9100
-600
-1300
-8400
12600
-2000
-1300
-3300
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Total 9300
Income statement according to Absorption costing
Particulars Amount
Sales (35*600)
less:
Cost of Production (16.33*700)
Closing stock (100*16.33)
Total Net cost
Gross Profit
Less:
Fixed and variable cost:
variable sales overheads (600*1)
Admin & selling cost (700+600)
Less- Over absorption
Net profit
21000
11433.33
-1633
9800
11200
600
1300
-300
9600
M2
In order to achieve the success and to fulfil the targets and objectives it will be required
that various tools and techniques should be used by company and they will be known as the
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management accounting techniques (Bodie, 2013). The important tool that can be used is the
budget making by which future will be estimated and it will be found that how much expense
and income are required to be made so that the company can be operated in the best possible
manner. In this all the historical data will be used and the estimates will be made by taking help
of the future projections which will prove to be of great help to the company.
D2
Above mentioned are the two methods that are used to calculate the cost and then with
the help of them income statements have been made,. It can be seen that profits that are derived
with them are different and this is due to the difference in the manner of treatment that is
provided in relation to fixed cost. The net profit with the help of marginal is 9300 and with the
help of absorption is 9600. in case of marginal the fixed cost is not allocated so the profit that is
derived in this is lower then that which is arrived by the absorption costing.
TASK 3
P4
The budgets are the plan that are made by every business so that they can be aware about the
activities that are to be performed by them and also the expense and income that will be made
will also be identified. In this the past years data will be used and on the basis of that and the
estimations that will be made in relation to future the budget will be prepared. Then after this the
actuals and the budgeted figures will be compared with each other so that the deviations that are
present between them can be identified. With the help of them performance of the company will
be evaluated. There are certain reasons due to which these variances arise and it will be required
that they should be identified so that the corrective measures can be taken in order to remove
them. By the help of them the objectives that are set will be achieved. The waste that occurs in
any process can be eliminated with the help of them as the coordination among various
departments that are involved will be improved (Baldvinsdottir, Mitchell and Nørreklit, 2010).
There are many advantages and disadvantages in relation to them which are described below:
Merits of Budgetary control:
 with the help of budgetary control centralised system will be established that will help in
proper functioning.
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 The efficiency of the employees will be increased with the help of it as they will be
required to fulfil the targets that are mentioned in the budget (Cinquini and Tenucci,
2010).
 By the achievement of the set goals the company will be able to increase its profitability.
Demerits of budgetary control:
 The budget will prove to be a failure if the management of the company will not be
supportive which will be not good.
 In the changing economy it is very difficult to make the correct budget as it will not be
possible to incorporate all the changes that are taking place.
 In the preparation of budget lot of time and money will be involved so it can be said that
this is a costly and time consuming process.
Budgets are important part of company because it will help to know about future
prediction regarding company growth and its performance. It is need to be prepared in order to
manage and control various resources of those are going to be used by the company in coming
future. Spending and effective use of strategies are useful aspects of increasing property as well
as profit of the company. There are different types of budget those are being prepared by the
company in their business operations. Some of them are:
 Master Budget: It refer to an aggregate of company total budget that are prepared to
indicate financial activity and growth position. It is summaries with various factors like
sales, operating expenses, assets and income those are allowed to the company.
 Operating Budget: An operating budget is a kind of that budget statement which
contains all the relevant information about expenses those are incurred during production
process (Cadez and Guilding, 2012). It present complete picture of operating budget that
are related with various factors like sales, production, labour cost and material costs and
overhead, production cost etc.
 Cash flow budget: A cash flow is an estimation of cash those are coming in the company
and going out from the business within specific time allotted with to it. It is comprises of
various activities like operating, investing and financing etc. all those cash transaction
those are done in the form cash are being recoded under this budget. It consist of various
factors such as accounts payable and account receivable to know that company has huge
cash on hand to continue operating in coming future.
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 Financial budget: It refer to be those budget which are based on company present
conditions. It will help to plan and prepare strategies in relation to managing its assets,
cash flows , income and its expenses (Burritt and Schaltegger, 2010). It is preprepared to
know about company financial health positions and it present complete overviews of its
investment to earn maximum profit and help the company in more its units from one
division to another.
 Static budget: A static budget is combination of fixed budget that unaltered regardless of
changes in relation to various factors like sales capacity and revenue. It will help to
manage its inventory to know about increase and decrease in sale volume.
M3:
From above mentioned planning tools for budget are being analysed accordingly before
implementing under different situations. Manager must aware about decision taken in relation to
company growth and its development that can be utilised in its budget through using appropriate
tools. Price scheming deviations and communication network are important planning tools that
are being used by the company. In which pricing strategies are one of the main important tools
used by the company to control it costs. It will help to measure company performance and it
future stability in one single statement.
P5:
By using appropriate management accounting system a manager of ABC Ltd will be take
control of decision that would help the company in recording and controlling management
performance (Bodie, 2013). With the help of management accounting the mangers of ABC Ltd
will be use to take important decision that are beneficial for the development company as in
relation to financial data are use to make various report. Timely availability of information is
being the main advantage that are help in preparation of budget for the company.
As under this financial data in relation to functions of business operations such as change
in production cost and make use of data and information in preparation of report by the manager
to analysed the impact on the productivity on the business performance. Every organisation has
to face certain problems that are to be overcome through using different strategies and decision
regarding development of company according to the polices.
Comparison of ABC Ltd and Sollatex Ltd.
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