Analysis of Management Accounting Practices and Reporting for ABC Ltd

This report delves into the realm of management accounting, focusing on the internal information processes that drive strategic decision-making within ABC Ltd. The analysis encompasses various aspects, including the definition and evolution of management accounting, its distinction from financial accounting, and the diverse systems employed, such as cost accounting, inventory management, and price optimization. The report explores different reporting methods, including performance, budget, and accounts receivable reports, and their integration into organizational processes. Furthermore, it examines costing techniques like direct and indirect costs, cost analysis, cost-volume-profit analysis, flexible budgeting, and various costing methods such as marginal costing, absorption costing, and activity-based costing. The role of costing in setting selling prices and managing inventory costs is also discussed. The report then explores budgetary control, outlining its advantages and disadvantages, and concludes with a comparison of different management accounting systems adopted by organizations.

Management
Accounting

Table of Contents
INTRODUCTION.....................................................................................................................................3
TASK 1.......................................................................................................................................................3
P1 Define management accounting along with its essential requirements.........................................3
P2 Various methods for management accounting reporting..............................................................5
TASK 2.......................................................................................................................................................7
P3 Different techniques of costing that are used by cost calculation.................................................7
TASK 3.....................................................................................................................................................12
P4 Different planning tool of budgetary control along with its advantages and disadvantages........12
TASK 4.....................................................................................................................................................15
P5 Comparison of the ways in that organization adopts management accounting system...............15
CONCLUSION.........................................................................................................................................17
REFERENCES........................................................................................................................................18

INTRODUCTION
Management accounting refers to the process of recording internal information in order to
make and implement strategic decisions for the benefits of organization (Liff and Wahlstrom,
2018). In order to examine the business performance in the external marketplace, internal
stakeholders like employees and managers plays an important role. This will also help external
stakeholders for identify the present status of a company. In this report ABC Ltd. Is taken which
is a manufacturing company. Under this report discussed about the management accounting,
reporting, accounting systems, costing methods, planning tool for budgetary control and its
advantages and disadvantages etc. In addition, study about the effectiveness and implications,
financial challenges as well as ways to solve those challenges.
TASK 1
P1 Define management accounting along with its essential requirements.
Management accounting: It refers to the process of examining and communicating
information with the manager in order to observe the performance of ABC ltd. And design
strategies as per the requirement (Fleischman and Parker, 2017).
Origin and evolution of management accounting: It was originated after the financial
accounting that can trace its origin into stewardship character in various trading ventures. Mainly
two major industries such as textile and railroad played a significant role in its evolution.
Management accounting system: This is used by the manager of ABC limited in order to
keep suggested records of operational and functional departments of a company. ABC used
many systems for the purpose of determine the actual sales of business.
Explanation of management accounting: It defined as a process of creating various
management accounts and reports for the purpose of identifying actual sales through which a
manager of ABC limited formulate appropriate strategies for operating regular activities and
functions (Kerr, Rouse and de Villiers, 2015).
Difference between management as well as financial accounting:
Management accounting Financial accounting
It facilitates the whole information of a In this, external stakeholders get information

company to its internal stakeholders such as
manager, employees etc.
regarding the financial performance of ABC
limited.
To do a management accounting there is no
specific principles as well as standards
(Cooper, 2017).
Financial accounting conducted by using
specific measures, principles as well as
standard of accounting.
Different systems of management accounting: Cost accounting system: This system is used by the financial advisor of ABC limited for
the purpose of recording all information of an organizational expenditure either direct or
indirect that are related to the manufacturing industry (Morillo and Montesinos, 2015). Inventory management system: This is basically related to the manufacturing industry as
to manage the inventory for preparation of final goods. Three techniques are mainly used
in as an inventory management system like LIFO, FIFO, AVCO for maintaining stock
according to the requirements. Price optimization system: It is used by the ABC limited in order to sets optimum prices
of their products for constructing is able to fulfil customer’s expectations or not.
 Job order costing system: It is used to allocate and gather cost of each activities or
manufacturing unit of an ABC limited. As this helps in analyzing the entire cost of each
activity that are manufactured or offered as per the customer specification (Monden,
2019).
Benefits of management accounting system:
Management accounting
system
Benefits
Cost accounting system This is used by ABC limited for keeping a record of all cost
which are involved in business activities.
Inventory management
system
It is applied in ABC ltd. Through which manager of the company
able to know about the requirement of inventory in order to
perform activities.

Price optimization system In this, manager sets specific prices of products that are required
to meet the customer’s expectations (Brustbauer, 2016).
Job order costing system This system is used by ABC limited for identifying the several
activities which are performed according to the clients’
requirement or specification.
P2 Various methods for management accounting reporting.
Management accounting reporting: It refers to the procedure of making several
management accountings reports that includes many information regarding the company’s
performance.
Features of good information system: Accuracy: Good information system helps in gathering accurate informations towards the
performance of a company that can direct stakeholders for making strategic decisions.
 Reliability: This facilitates reliable informations to its users that assists them to know and
examine the actual status of company (Meidell and Kaarbøe, 2017).
Reasons behind understanding and comprehensive of report:
 It is crucial that management accounting systems must be comprehensive as well as
understandable because through this a manager can measure actual status or performance of
ABC limited.
 As management accounting reports direct managers in order to plan innovative as well as
strategic strategies for the improvement ABC limited but if there are not clear understandability
the it is not thinkable for manager to complete the activities (Tucker and Leach, 2017).
Different methods of management accounting report: Performance report: This can basically base on the purpose of keeping performance
records related to all operations of ABC limited. This is used by the company for
gathering and recording informations regarding employees as well as business

performance. As it helps in facilitating incentives and bonus to employees according to
their efforts for attaining the tasks which are assigned to them. Budget report: It is considered as a internal report that can applied by ABC limited in
order to estimate budget for different operational and functional department. It is used for
understanding the gap between actual and standard spending to measure the performance
and execute all functions in estimated budget (Cowton, 2018). Account receivable report: This is formed to list owned of many customers and this can
used while a company ABC limited provides goods and services to their clients on credit
basis. This helps in determining the unpaid amount which are due by clients as well as
overcome from the late payment issue of company.
 Inventory management report: This report can be used to keep the records regarding the
inventories that is kept by the ABC limited. It is benefited for a business organization as
it helps in checking the status of inventory that is delivered to its customers (Mahmoudi,
Jodeiri and Fatehifar, 2017).
Integration of management accounting systems and report in organization process:
There are several management accountings reports and systems which are integrates with
the organizational procedure. Mainly price optimization is used by ABC limited in order to set
specific prices for goods and services. Whereas, accounting receivable reports are used to
constrict credit policies by examining the total preserved expanse of many customers.
TASK 2
P3 Different techniques of costing that are used by cost calculation.
Cost: It is the amount which is needed to be paid by a buyer to seller for a particular
products and services.
Type of cost: Direct cost: This is related to that which are directly related to the organizational
activities such as depreciation, salary, insurance etc.

 Indirect cost: These expenses are not directly related to the accountable activities for
ABC limited such as rent, office utilities (Brewer, Garrison and Noreen, 2015).
Cost analysis: This can be referred as a procedure which is in used to analysis the
importance of several actions which are taken by ABC limited for earning profits. This will help
in analyzing the decisions which were formulated by company in order to accomplish long term
objectives.
Cost volume profit: This is related to the cost accounting method that is implemented by
manager of ABC limited for identifying effects of alterations in cost as well as volume on the
profits of business organization.
Flexible budgeting: It is defining as a method of framing budgets in that alterations could be
complete according to variations in an activity. It is in used by ABC limited for making changes in budget
as per the varying cost.
Cost variance: This is used by ABC limited to analyse the gap between actual and budgeted
cost of manufacturing.
Marginal costing: In this, the cost of per unit remains same and based on the fixed and
variable terms as it helps in resolving the problem of over and under absorption. It is used by the
management of ABC limited in order to sets, price, profit, BEP calculation and decisions.
Absorption costing: This refers to the use for recording a financial performance of a
company as it provides a clear view about gross and net profit of ABC limited that helps in
assigning fixed overheads expenses for specific departments.
Fixed cost: It refers to that cost which is remain constant whether the production quantity
fluctuate either increase or decrease ( Kenyon and Kenyon, 2016).
Variable cost: This is the opposite of fixed cost which is fluctuated according to the changes
in the level of production.
Cost allocation: It can be referred as a type of systematic procedure which is related to the
process of finding, aggregating as well as allocating the cost to specific objectives.

Standard costing: It refers to the cost which is approximated not actually occurred and it is
based on the past year information of accounting.
Normal costing: It refers to that type of cost which is incurred actually in order to complete
the operational activities.
Activity based costing: It is related to the several activities that are analyzed to allocate cost
for each single activities with regards to the production as well as services.
Role of costing in selling price: Costing plays an important role in setting the prices of
products and services because price includes the profit margin in their total cost of production.
For example, in the context of ABC limited company the cost of a particular unit is £20 then
price will be £25 and prices set by adding £5 in their actual production cost (Gray and Alles,
2015).
Inventory cost: It is related to that type of expenses which includes ordering, holding and
purchasing cost. These costs are considered as follows: Ordering cost: It is that type of cost which are occurred during the procedure of creating
suppliers orders towards the purchasing of goods. For example: The cost of invoice that
are required for producing a supplier order. Carrying cost: It also known as a holding cost that occurs in ABC limited while the
company holding inventory in stock.
 Shortage cost: ABC limited face this cost when they do not have material in stock (Ruch
and Taylor, 2015).
Benefits of reducing inventory cost:
 Decrease in inventory cost, increases the profit of company as it saved some amount that
are used for reinvestment.
 Decrease inventory cost results in setting competitive prices in competitive era that
attracts large customers.
Valuation method: LIFO: In this method, last received material is used first for producing goods.

 FIFO: In this, first received material is used for conducting operational activity.
Cost variance: For understanding the gap between actual and budgeted cost many kinds of
variances are in used such as cost, usage and price variance. ABC limited examine the gap
between budgeted and actual cost, usage and price factors.
Overhead costs: It includes all expenses that are occur while ABC manufactured goods such
as depreciation, taxation as well as insurance charges.
Calculation of profit & loss using Absorption costing:
Interpretation: From the above calculation of absorption costing it shows that ABC limited have budgeted
profit in 2019 is 150000 and actual profit is 155000.

Interpretation: It has been considered from the above calculation of variable costing that
ABC limited has equal profit of actual and budgeted in 2019 that is 140000.
TASK 3
P4 Different planning tool of budgetary control along with its advantages and disadvantages.
Budget: It refers to the estimating tool that is in use to examine the future expenses and
incomes related to the specific period of time. As ABC limited use different budgets as per their
requirements.
Preparing a budget: At the time of budget formulation many steps are takes place that are
required to be followed by the manager of ABC limited in order to analyse the present position
of the company as well as available resources. After that formulate several plans that are
approved by manager in the betterment of an organization (Hoque, 2018).
Different type of budget:
 Capital budget: In this, ABC limited is used to record all information that is related to the
various activities and functions in which a large capital investment is also considered.
ABC limited used this budget for analyzing financial performance and make plans for a
specific duration of time.
Advantages Disadvantages
Capital budget records all the activity of all
projects where the company invested large
amount of financial resources.
Lack of specificity is a demerit of this budget
as it includes the collective information
records of all departments of company.
 Operating budget: It is related to that kind of budget in which overall expenses and
income of all projects are estimated that is totally based on the predicted sales as well as
revenue of ABC limited (Albanese, Andersen and Iabichino, 2015).
Advantages Disadvantages
It shows a clear view to the company’s
manager that monetary resources are properly
in used or not.
In this manipulation of figures could be done
simply so it is a disadvantage of operating
budget.

Alternative method of budgeting:
 Zero based budgeting: This kind of budget is origin with the zero amount and used for
justifying the all expenses for every new period of time. It is mainly used by ABC limited
for minimizing the operational cost of company.
Advantages Disadvantages
It is accurate in nature as it is formulated for
each new accounting year with a zero base.
This is not suitable for short period of time
planning as it can be biases by the company
manager.
 Traditional budgeting: It is related to the cash inflows and outflows of each income and
expenditure for a time period. It is expected to be followed by ABC limited monthly and
quarterly in order to keep the track record of financial resources.
Advantages Disadvantages
It helps in analysing company’s loss easily in
their financial statement.
It restricts the organizational ability to deal in
credit transactions.
Behavioral implication of budget:
 Budget helps in developing the interaction and coordination among the company’s
employees.
 It will result in efficient resource allocation that referred actual data rather then budgeted.
 Process of budget preparation is complex in nature as it requires a high amount of
financial investment.
Pricing strategies: Penetration: In this a company ABC limited can initially sets low prices for their
offerings which are offered to the customers for selling purpose.