Management Accounting Report: Profit Calculation and Planning Tools

This report provides a comprehensive overview of management accounting (MA), beginning with an introduction to the core concepts and essential requirements of MA systems. It delves into various MA reporting methods, including budget reports and performance reports, and explains the purpose and use of financial statements like the trading account, profit and loss account, balance sheet, and cash flow statement. The report then explores different MA systems, such as cost accounting, inventory management, and job costing systems, evaluating their advantages and applications within an organization. Furthermore, it presents the calculation of profits using marginal and absorption costing methods, along with an analysis of cost, volume, and profit relationships. The report also discusses the advantages and disadvantages of various planning tools like zero-based budgeting, cash budgeting, and capital budgeting, analyzing their uses within an organization. Finally, it examines how organizations can adopt MA systems to resolve financial problems, such as high costs and resource shortages, concluding with a comparison of organizations that utilize MA systems to address financial challenges.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
LO1..................................................................................................................................................3
P1. Describing MA and an essential requirement of its system .................................................3
P2. Explaining several methods for the MA reporting ...............................................................4
M1. Evaluating advantages of MA system and its application within organization...................5
D1. Critically evaluating integration between reporting and systems of MA ...........................6
LO2..................................................................................................................................................6
P3&M2. calculating profits by applying marginal and absorption costing ................................6
LO3................................................................................................................................................10
P4. Explaining advantages and the disadvantages of the several planning tools ......................11
M3. Analysing uses of various planning tools ..........................................................................12
LO4................................................................................................................................................13
P5. Comparing the organization that adopts MA systems in resolving financial problem .......13
CONCLUSION..............................................................................................................................14
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting referred as the process of assessing the costs of the business and
the operations for preparing an financial report for internal management. The present report is
based on different aspects of the MA that involves concept and essential of MA systems.
Moreover, it highlights computation of the profits with an application of the marginal and
absorption costing tools. The study also presents different planning tools and systems that helps
in resolving the financial problems.
LO1.
P1. Describing MA and an essential requirement of its system
MA refers to the principle that involves framing and providing the timely statistical and
the financial information to the managers of the business in order to make routine decisions. The
main elements that are included in management accounting are decision making, planning and
controlling.
The main functions of the MA systems is to facilitate data, modifies or alter the data,
interpret and analysing data which serves as the means of a communication, facilitating control
on accounts and provides for quantitative as well as qualitative information.
Financial accounting system means the system in which financial data of an entity is
been maintained. The main purpose of this process is to teach process in respect of maintaining
the financial accounts in the system (Cooper, Ezzamel and Qu, 2017). It means the procedures
and a system that is designed for an auditing and the internal control of the company.
Cost accounting system involves two types of the methods that are as follows-
Product Costing- It means the process of accounting that involves identification of all
the expenses of the business relating to production of an entity's products. For example- cost of
raw material, transportation cost, worker wages etc.
Activity based costing- It is the method which determines an activities within the
organization and assigns cost for each of the activity towards all the services and the products in
accordance to actual actual consumption by every activity. It is the method that tracks an
overhead costs to the activities and assigning it to the objects.
MA systems acts as the decision support system which helps in ensuring control on an
organization with management of an investment and the profitability.

Tax accounting- This type of accounting includes adjustments in relation to partnerships,
international taxation, individuals, corporations (Maas, Schaltegger and Crutzen, 2016). Each
and type of business has to follow the provisions of tax accounting in an appropriate manner for
operating their business in compliance with rules and regulations.
P2. Explaining several methods for the MA reporting
Budget report- It is the report that involves estimation of the expenses and the income so
that proper controlling can be ensured by the firm. It act as crucial as it helps the managers in
reviewing the actual income and expenses with that of the budgeted figures in order to avoid
financial gap.
Performance report- This report is created for analysing the performance of an
organization as well as the employees at the period end (Mirzaey, Jamshidi and Hojatpour,
2017). It helps in creating effective strategies by the managers for reaching to the mission of the
company.
Accounts receivable report- This report includes details regarding the remaining balances
of the clients that are due. By preparing this report, manager could be able to identify defaulters
and in finding out the issues in company's process of collection.
Purpose and the use of financial statements
Trading account- This account is formulated for determining amount of the gross profits
and the losses that are made by a business within an accounting period. It is used for ascertaining
information relating to opening stock along with closing stock value.
Profit and loss account- The main purpose of preparing this account is to summarize the
expenses, revenues and the cost that are incurred in a particular period (Panchenko, 2018). Such
records facilitates an information about an ability of the company in generating the profits by
way of increasing the revenue, lowering cost etc.
Cost of sales- It means the cost incurred in producing the goods that are sold by the firm.
The main purpose of computing cost of sales is to ascertain an accurate cost in selling the goods
so that accurate value of gross profits could be attained. It is used for calculating gross profits fro
the company.
Balance sheet- The foremost purpose or objective of framing balance sheet is to assess
the financial position of an enterprise. It is used by the external parties in order to analyse the
financial state of an enterprise.

Cash flow statement- The purpose of formulating CFS is to depicts the cash position of
the firm. It is used to identify the cash inflows and outflows of an enterprise with respect to
operating, investing and financing activity of an organization.
Systems of MA
Cost accounting system- It refers to the system which is used by the firms in determining
the product cost for the purpose of profitability analysis, controlling cost and valuation of an
inventory (Uyar and Kuzey, 2016). It is crucial for the company as it helps in evaluating
accurate cost of the products for achieving profitable operations.
Inventory management system- This system relates with the processes and the
procedures which oversee maintenance of an inventory in the premises. It is crucial as it helps in
tracing appropriate level of inventory through an entire supply chain that is from business
premises to the ultimate customers.
Job costing system- It refers to the process of accumulating an information about cost
attached with particular job or the production. It is important as it helps in submitting cost related
information to customer under the contract within which costs are reimbursed.
Price optimisation system- It is program that computes varying demand at the different
price levels. This system is essential in determining the most suitable price for the product which
helps in improving profits.
M1. Evaluating advantages of MA system and its application within organization
MA is an important part of the company as it acts as the bridge between finance and other
business parts. It enables in ensuring better controlling as its key task is to assure long run
success of an entity in the future periods.
Systems Benefits
Cost accounting system It helps in estimating the cost that is incurred in
producing the product.
Price optimisation system This system assist in determining the demand
of the product (Azudin and Mansor, 2018.). It
also helps in setting up of the best prices that
facilitates maximum profit and affordable to
customers.

Job costing system It is the system that helps in identifying cost
relating to each job in manufacturing the
product.
Inventory management system This system helps in maintaining optimum
level of an inventory.
D1. Critically evaluating integration between reporting and systems of MA
The system of MA are employed on the basis of the reports as it helps in performing the
task in an appropriate manner and as per the standards set. This shows that both reports and
systems of MA are integrated as it helps in presenting the financial information which includes
details relating to income, expenses, reserves and capital.
LO2.
P3&M2. calculating profits by applying marginal and absorption costing

Cost refers to an expenditure that is needed for producing and selling the product or
making an
asset ready for the purpose of normal use. There are various types of costs that are as follows-
Fixed cost- It means the cost that remain fixed or same irrespective of the change in
production activity. For example- cost of premises, rent etc.
Variable cost- It is referred as the cost that changes with the change in level of output.
For instance- raw material cost, selling cost etc.
Semi variable cost- It involves both fixed and the variable cost such as labour cost,
commission etc.
Cost volume profit- It is used for identifying the changes in the cost and the volume that
affects an operating income of the company. It is the point where the fixed and variable cost are
constant with constant selling price.
Flexible budgeting- It is the planning tool which adjust the amount in accordance to the
change in activity and the volume.
Cost variances- It means an analysis of the difference between the standard and the
actual cost in order to analyse the variances or deviation.
Standard costing- It means the practices that involves substituting expected cost with
that of an actual cost within the accounting records.
Absorption costing- It is the technique that captures all types of the costs associated to
producing the specific product.
Marginal costing- It refers to the costing tool where the marginal cost that is the variable
cost is been directly charged to unit cost whereas fixed cost is entirely written off.

LO3.

P4. Explaining advantages and the disadvantages of the several planning tools
Zero based budget- It means the budgeting method within which all the expenses are
been justified for every new period or from the zero-base.
Advantages Disadvantages
This planning tool helps in re-examining and
re-evaluating of all the items (Advantages and
disadvantages of Zero based budget, 2018).
This helps in avoiding redundant activities and
irrelevant items in the budget.
It require high manpower which in turn results
in high cost of training.
It helps in allocating the resources efficiently
and effectively.
This technique is found as time consuming
because it involves preparation of budget from
scratch.
Cash budget- It refers to an estimation of cash flows for a business over a particular
period of time. It is use for assessing that the company is having adequate cash in operating its
business.
Advantages Disadvantages
It helps in determining the cash inflows and the
outflows of the firm.
This budget limits the spending power of an
entity which in turn limits the overall
productivity (Benefits and limitation of cash
budget, 2018).
It enables in knowing the cash position of the
company.
It Limits an ability of the company in building
its credit profile.

Capital budget- It means the budget that is prepared by the business in evaluating the
potential for the major investments or the projects.
Advantages Disadvantages
It helps in assessing the profitability that the
project would be generating.
It does not provided accurate evaluation of
profit as analysis is made on the basis of
different methods.
It enables in selecting the most suitable project
and helps in evaluating viability & desirability
of the proposal.
In some cases it does not involve time factor
which in turn result in inaccurate evaluation.
M3. Analysing uses of various planning tools
Zero based budget- This tool is useful as it assist in improving the coordination and the
communication in the departments.
Cash budget- It acts as the most useful planning tool for an organization as it enables in
keeping the track of all the expenses and the income.

Capital budget- This planning tool is useful for the company in analysing the feasibility
of the project or the proposal for which the company is looking for an investment.
LO4.
P5. Comparing the organization that adopts MA systems in resolving financial problem
There are several financial problems which are faced by the firm in context of high cost,
low demand, lack of funds, shortage of the resources, variance in actual and budgeted values etc.
In order to resolve these financial problems, there are various MA systems or the techniques
which helps in overcoming such problem that are as follows-
Benchmarking- It means comparing the processes, methods and procedures of business
with its competitors so that competitive advantage could be gain within the industry. This
technique assist the firm in overcoming the financial inefficiencies that is present in the premises
like high cost of production, ineffective strategies etc.
Key performance indicator- It is the value that reflects an effective ways or measures
through which an enterprise could achieve its objectives successfully (Mirzaey, Jamshidi and
Hojatpour, 2017). It helps in overcoming financial issues regarding ineffective methods and
procedures, non-achievement of the targets.
Balanced scorecard- It is the tool that helps the firm in viewing all its major perspectives
that involves customers, internal process, business growth and financial resources. It enables in
resolving the problems regarding shortage of funds and the resources.
Variance analysis- This technique evaluates deviations in the actual behaviour against
planned behaviour in the budgeting (Uyar and Kuzey, 2016). It helps in overcoming the problem
relating to financial gap and enables the company in performing the task as per the standards set
and budgeted.

CONCLUSION
By summing up the above report, it has been analysed that MA plays a critical role in
managing the operations of the company in an effective way. Using of MA reports and the
systems helps in managing the inventory, controlling the cost and in performing the task as stated
in the report so that goals can be achieved with gaining growing success.

REFERENCES
Books and journals
Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of
organizational DNA, business potential and operational technology. Asia Pacific
Management Review. 23(3). pp.222-226.
Cooper, D. J., Ezzamel, M. and Qu, S. Q., 2017. Popularizing a management accounting idea:
The case of the balanced scorecard. Contemporary Accounting Research. 34(2). pp.991-
1025.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Mirzaey, M., Jamshidi, M. B. and Hojatpour, Y., 2017. Applications of artificial neural networks
in information system of management accounting. International Journal of Mechatronics,
Electrical and Computer Technology. 7. pp.3523-3530.
Panchenko, O., 2018. Place and role of management accounting in the general accounting
system. Accounting and Finance. (3). pp.75-82.
Uyar, A. and Kuzey, C., 2016. Does management accounting mediate the relationship between
cost system design and performance?. Advances in accounting. 35. pp.170-176.
Online
Advantages and disadvantages of Zero based budget. 2018. [Online]. Available
through:<https://efinancemanagement.com/budgeting/zero-based>
Benefits and limitation of cash budget. 2018. [Online]. Available through:
<https://brandongaille.com/15-cash-budget-advantages-and-disadvantages/>
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