Management Accounting Report: Costing, Budgeting, and Financial Tools

This report focuses on management accounting principles and their application within the context of Alpha Ltd, a UK-based manufacturing firm. It explores various management accounting systems, including cost accounting and inventory management, and their role in planning, decision-making, and organizing. The report details different management reporting methods, such as performance, budget, and inventory management reports, and contrasts financial and management accounting. It delves into costing techniques, specifically marginal and absorption costing, providing calculations and comparisons to determine profitability. Furthermore, the report examines budgeting tools and their importance in financial forecasting, including static and flexible budgets. Finally, the report analyzes financial statements, evaluates the impact of installing new machinery, and offers recommendations based on financial performance and break-even analysis. The report underscores the significance of integrated management accounting systems and reporting for effective financial management and decision-making.

MANAGEMENT
ACCOUNTING

Table of Content

INTRODUCTION
Management accounting is an important aspect for business organisations as it helps the
manager of an organisation to formulate distinct income and financial reports in a proper manner
(Alyousef and Mickan, 2016). This involves multiple accounting techniques that helps a
company to gain accurate information about finances and accounts. This report is prepared in
context to Alpha Ltd which is a Britain based manufacturing firm employing around 50 workers
and earns an annual turnover of £500,000 every year. This company is planning to opening up
their franchises. This report is going to mention about distinct kind of management accounting
systems and reports along with various costing techniques to prepare financial reports. In this
context, use of both absorption and marginal costing will be shown. Also, usage of various
planning tools for forecasting and estimating budget is carried out. In last part of this project,
different kind of financial tools are used so that organisational issues related with finance can be
sorted out in a proper manner.
TASK 1
P1
Management accounting incorporates accounting techniques and tools which helps a
company to reduce their overall spending and increase their profits (Management Accounting,
2020). Main role of MA in a company is to plan and control all the operates related with finance
and accounts. Purpose of MA are listed down:
 Planning: Management accounting helps the manager to plan how they can formulate
their budget or solve their financial issues so that high organisational productivity can be
gained.
 Decision making: As systems and reports of MA helps in getting wider information
about finances of firm, it became easier for manager to take strategically advantageous
decision. This helps in taking only right business decisions (Anessi-Pessina and et. al.,
2016).
 Organising: Management accounting assists the workers to execute their work in
systematic manner due to which organisational activities are organised properly. This
helps the manager in Alpha Ltd to gain high productivity while performing organisational
work.
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Management accounting system are known as an internal system which is implemented
in the business environment to assess the ongoing process by utilising various tools of
accounting system (Bierma, Waterstraat and Ostrosky, 2017). In the context of innocent drink
there are various tools to improve the performance and to adopt those techniques which is used
to implement MAS in accurate manner. Some kinds of administration accountancy systems are
as below:
Cost accounting system- This management accounting system is utilized by
manufacturers to analyse production and production activities in a systematic way (.Cost
Accounting system, 2020). This method is used by organisation to monitor or oversee the actual
cost of their work. Regarding Alpha Ltd, this system is good for administration because it leads
them to decide the actual cost for their work. This also helps the management to control the
quality of their work.
Inventory management system: It is an accounting systematic that permits an
organisation to communicate the actual status of their inventories, stocks and other materials in
proper manner. Organisations like Alpha Ltd can use this system to identify if all the material
required for production of Pizza are available to the firm or not. Generally, there are two
methods to manage inventory in an organisation. These methods are stated below:
 LIFO: In this method, last purchased material is used first for manufacturing purpose so
that high tax advantage can be gained. This method will allow Alpha Ltd in getting lower
balance of remaining inventory so that tax liability can be reduced (Chenhall and Moers,
2015).
 FIFO: In FIFO method, inventory which is purchased first is used earlier for
manufacturing. This method will help Alpha Ltd in reducing the wastage of inventory so
that overall expenses of firm can be reduced and high advantage can be gained.
Price optimisation system: It is a managerial accountancy system that helps a firm in
acknowledging the opinion of clients about their pricing strategy. With the usage of this
method, administrator in concerned firm can find out the willingness of customers to
purchase their offerings. Also, this system will help the company to formulate pricing tactics
so that they can achieved maximised sales and revenues.
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P2
Management reporting can be characterized as a procedure that represents the fiscal data
of organisation in the form of reports. There are various activities that are performed by
management to run daily operations and functions of organisation in the market (Ghasemi and et.
al., 2016). One of them is preparation of managerial reporting. Main reason of using managerial
report is that it focus on segments of business rather than giving an overview of overall business
finances. Different kind of administration accountancy system reports are defined under: Performance report: This is one of the basic report of management accounting which is
formulated on regular basis to identify the overall productivity of the company. This
report can be utilized by Alpha Ltd to examine and compare the execution of workers
and business so that overall performance can be evaluated. By this, taking right business
decisions will be easier for management. Budget report: In this managerial reporting, budget for an organisation is prepared and
allocated to different departments as per their requirement. Without this report, it is not
possible for a company to allocate right amount of budget to organisations. Alpha Ltd can
usage this written report, to give required funds to different department so that
organisational activities can be carried out efficiently (Granlund and Lukka, 2017).
 Inventory management report: This report helps in analysing the amount of stock,
resources and materials present in a company for manufacturing purpose. Primary
intention of using this report is to maintain the records of organisational merchandise in
different intervals of time. Alpha Ltd can use this report to check if needed resources for
production are available in right quantity or not.
Differences between managerial and financial accounting
Financial accounting Management accounting
 In this technique, financial reports are
prepared to discuss business activities
with external uses like bankers,
government officials, stakeholders etc
(Hiebl and et. al., 2015).
 This includes creation of income
reports and statements for employees
and employers of an organisation so
that they can take right business
decisions.
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 This accounting helps in identifying
accurate financial position of a firm for
a specific time slot.
 MA techniques aims to fulfil future
goals of company so that maximised
benefits can be attained.
 It addresses appropriate valuation of
liabilities and assets due to which it is
concerned with revaluations and
impairments.
 This is not related with the value of
revaluations and impairments. This is
concerned with overall productivity
only.
 This has high compliance with
accounting standards
 Managerial accounting do not comply
with any standards when a data or
information is used for intrinsic
consumption.
M1
Management accounting system Benefits
Cost accounting system  This method will assist Alpha Ltd in analysing their
organisational procedures so that needed
modification in manufacturing, delivering or
distributing process can be carried out. By this, extra
cost of company will be cut and high revenues can
be gained in appropriate manner.
Inventory management system  By implementing inventory management system, it
is easy for Alpha Ltd to manage their inventory cost
in effective manner. Along with it, this method will
apermit Alpha Ltd to define the way by which
inventory and its value is identified and estimated on
the basis of raw-materials as well as finished goods.
Price optimisation system  By using this system, manager in Alpha Ltd is
capable to acknowledge the choice, opinion and
preference of customers about the prices of their
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products (Johnstone, 2018). Due to this, company
can easily change and optimise their price as the
expectation of customers. By this, high revenues can
be earned.
D1
Management accounting system leads an organisation to manage work and to make
effective decisions that enhances the performance and profits for the firm. On the other side,
management reporting helps organisation to operate and managing their work in internal and
external departments in efficiently manner (Kalkhouran and et. al., 2015). For instance, to
prepare inventory report, inventory management system is used so that actual status of inventory
can be identified. If inventory system will not be used, manually counting of inventory is not
possible. Due to this, inaccurate report will be prepared. Hence, it is important for management
accounting system and reporting to work in an integrated way.
TASK 2
P3
Cost is characterized as the amount which is given to by the people in exchange of a trade
good or service. While producing a commodity, some cost is incurred. This cost is called as
manufacturing cost. In general, there exist two kind of costs which is discussed below:
Marginal costing: This method benefits in calculation of net profitability according to
variable cost only (Marginal costing, 2020). In this costing, fixed cost is ignored. Small firms
like Alpha Ltd use this method to prepare their financial report.
Absorption costing: This is other way to prepare financial report. In this method, both
variable and fixed cost is covered in identifying the profits of company. Large scale firm use this
method to prepare income statements (Leotta, Rizza and Ruggeri, 2017).
Problem 1 (1) Calculation of net profit under absorption costing method
Unit Selling Price 8
Unit Variable Cost 3
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Fixed Man. Expenses 150
Non Manufacturing Exp 50
Budget activity 150
Calculation of net profit under marginal costing method:
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Problem 2 (a)
a) Before installation of the new machine
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8

Problem 2 (b)
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2 c. Financial statement
Scenario 1
Solution 2d
Recommendations
If only the monthly profit are considered, the respective company should buy and install
the new techniques because thus can generate more net profitability. At 20,000 units per moth
variable expenditures will minimise up to 280,000 pounds and monthly fixed expenditures would
maximise by only 236,000. the saving in the variable expenditures is therefore larger than the
maximise in the fixed expenditures.
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M2
Different techniques which are related with management accounting are net profit and
loss statements, cash flow, balance sheets, Break even synthesis, absorption costing and other
techniques. All of these techniques plays a major role in formulating the actual financial
statement of Alpha Ltd. In case of Alpha Ltd, main techniques which are used are marginal,
absorption and break even analysis. Without usage of these techniques, it is not possible for
concerned company to acknowledge their financial position within market (Maas, Schaltegger
and Crutzen, 2016).
D2
Manager in Alpha Ltd has used both marginal and absorption techniques to prepare
income statement. In case of marginal costing, earning profits is high as compared with
absorption costing. This difference has raised because marginal costing do not consider fixed
cost while calculating total cost. As per financial statement, Alpha Ltd is required to install a new
machine. This machine will benefit them in earning the profit of £1,04,000. Also, BEP after
installation of machine is £0.00 if company is going to sold around 16,000 units. Hence, if
number of selling units will be increased, earned profits will further raise (Malmmose, 2015).
TASK 3
P4
Budget is characterized as allocation of funds to different business activities with an
expectation of earning maximum profitable result in future. There are different kind of budgets
which includes static budget, cash budget etc.
Static Budget: A static budget is a projection of future business expenses and sources of
revenue (Statistic Budget, 2020). Differences arising due to fluctuating costs of raw materials
and common budgeting errors are easily caught from the static budget in form of SBV (Static
Budget Variance). It is rigid in nature as it relies on previous period's actual figures and it does
not provide for adjustments in regard to actual current performance. New businesses often find it
problematic in using it as it needs past data as base to build a budget.
Flexible Budget: The negotiable monetary fund is the perfect alternate of Static Budget,
where the static budget is rigid on its estimates from past data, the flexible budget provides
flexibility as it optimizes itself to match the current units of production or cost measure used. It
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varies with the volume or activity and is always based on the actual units produced. This requires
continuous reconciliation to give the better results. It is best suited in new organisations or
organisations where the cash flows are uncertain (Messner, 2016).
In order to manage their budgetary control in a proper manner, there exist distinct kind of
tools which can be used by the manager of Alpha Ltd. Some of these planning ways are
expressed beneath:
Zero based budget: It is one of the primary component which is used for monetary fund
controlling. This tool helps in preparing budget for business operations by initiating via zero
base. This budget is prepared on annual basis and all the transactions which are carried out
previous year are ignored (Nitzl and Chin, 2017). Advantage of this budget is that it brings
transparency and accuracy in denoting the finances of the company. Main disadvantage of this
budget is that it ignores all the data of previous year due to which analysing pending financial
transactions became very difficult for the employees.
Master budget: To perform their work in a systematic manner, each department in a
company formulates their separate budget. This budget helps them in receiving required funds so
that organisational work can be executed without any shortfall of monetary system. Different
monetary funds which are prepared by an organisation are constituent of master budget. This
budget will help Alpha Ltd in showing all the fiscal transactions and acts at a single place.
Benefit of this monetary fund is that it helps in summarising all the budgets and income
statements of firm within a single document. Drawback associated with this budget is that it
includes various kind of budgets in it due to which finding required data and information became
a very time consuming and complex task (Nuhu, Baird and Appuhamilage, 2017).
Flexible budget: This budget is used by those companies that prefers to change their
policies and methods in accordance with the varying situation. Preparation of this budget assures
that contingencies faced by a company can be overcome in a proper way. In case of Alpha Ltd,
this monetary fund will assist in distinguishing the manner in which revenues and expenses of
firm will be altered so that right output can be gained.
In comparison with master and zero based budget, this budget is more suitable as it helps
in carrying out needed modification in a timely manner. Primary benefit of this budget is that it
assists in modifying financial statement of company as per market situation. Major disadvantage
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is that changing budget as per situation leads to confusion due to which employees face difficulty
in analysing financial statements (Schaltegger, 2018).
M3
Budget preparation is a procedure through which manager of Alpha Ltd will formulate
appropriate budget for company so that all the business acts can be executed in available money.
Forecasting is limited up to expenses and revenue line items. Forecasting of budget is carried out
at regular intervals, mainly at quarterly or monthly basis. There are distinct multiple tools like
zero budget, master budget etc. that can be used by manager of Alpha Ltd in preparation and
forecasting budget. Zero budget will denote activities of current year whereas master budget will
helps in analysing overall budget of company in a wider picture. The benefits arising from
management accounting systems are numerous, the computation of budget helps in estimating
levels of profitable production and putting caps on unimportant costs. Considering from the
context of Alpha Ltd Static budgets are very important as they work as base for different
variances calculation and their analysis. It facilitates comparison between what was expected and
what actually happened over the period. Alpha Ltd will also benefit from the flexible budget as it
provides adjusted budgeted forecasts with the actual units of production or cost measure used
(Tucker and Lawson, 2016). Flexible budgeting helps organizations to estimate profitability in
different levels of production.
Financial position of firm can be acknowledged with the help of SWOT analysis which is
discussed below:
SWOT on Alpha Ltd
Strengths Weaknesses
 Company offers high quality pizza to
the customers in genuine price. Due to
this, reputation of company is very
high.
 Organisation uses high quality
materials to produce their pizza. Due to
this, health of customers is not
compromised in any manner.
 This company is operating at small
scale due to which most of the region in
UK are unaware about their services
and offerings.
 Marketing tactics of organisation are
not very robust. This limits the sales of
company.
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Opportunities Threats
 Firm can start taking online orders. Due
to this, maximum people will be able to
purchase the offerings of company on
regular basis.
 Increase in online presence will
enhance the visibility of company due
to which high sales and revenues can be
achieved.
 Big organisations like Pizza Hut,
Dominoes etc. are operating very well
in UK. These firms can reduce the
popularity of Alpha Ltd among
customers (Tucker and Schaltegger,
2016).
 Other local companies are giving tough
competition to Alpha Ltd in terms of
sales and quality.
PESTLE Analysis
 Political factors: As company operates at small scale, they don't have to follow strict
policies and procedures. UK government also supports small and medium scale
organisation. This aspect highly favour Alpha Ltd.
 Economic factors: People in UK earn high income due to which they are able to afford
the products of company without any issue. This factor favours finances of company.
 Social factors: It is related to the choice, expectation, opinion and perception of people
of a region (Alyousef and Mickan, 2016). UK people are modern due to which they like
to have pizza on regular basis. But, health conscious people can avoid pizza due to which
sales of firm can be reduced considerably.
 Technological factors: Company is needed to update their technology so that production
can be carried out efficiently. This will help the company in serving their customers in a
proper manner so that maximised sales can be earned.
 Legal factors: Manager in Alpha Ltd is required to follow all legal laws related with
customers, employees and business firms. This will help the company to operate in legal
manner. If legal laws will not be followed then firm may have to pay heavy fines and
revenues.
 Environmental factors: Alpha Ltd. Is needed to preserve environment. In this context,
firm is needed to prepare environmental reports. If firm will not prepare this reports then
it will create a negative impact in mind of people due to which revenues and popularity
will be compromised.
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TASK 4
P5
Management accounting systems are accounting tools through which top authorities of
the organisation takes important decisions. This tools help business in increasing their
performance in the upcoming period (Anessi-Pessina and et. al., 2016). On the other side, it also
helps managers of Alpha Ltd to make effective strategies to resolve their financial issues.
Financial issues faced by company are discussed below:
 Late payment by customers: The company is providing their customers with the option
to make late payments for the products and services they had purchased but these
customers are not repaying the amount within specified period of time. This has impacted
negatively on financial position of Alpha Ltd.
 Sudden expenses: Future is uncertain so it is possible that there could be some
miscellaneous expenses that could be faced by company and it is important to sort out
them within time to reduce the effect on production. Hence, this is another reason
negatively impacting upon financial position of the Alpha Limited.
 Lack of Cash Flow: Most profitable businesses fail due to in-efficient cash flow
management. The stream of cash coming in and going out must be tracked to gain
insights into profitability as well as cash balance (Bierma, Waterstraat and Ostrosky,
2017). The liquidity risk pertaining with low amounts of cash and cash equivalents also
reduces an investor's willing to invest in the company.
 Bootstrapping: There are two different ideologies to fund a business, either the
promoters fund their business completely out of their pockets, or get investors and lender
provide funds for the company. The ideal way is to use an efficient mix of both in such a
manner that it reduces the cost of capital and does not dilutes control of the management.
The above situation could which is being faced by Rowlinson Knitwear could be solved
with the assist of various ways and techniques being provided as under:
 Financial governance: It is characterized as the way in which an organisation manages,
monitors, collect and direct their financial information in a proper manner. This tool
involves the manner in which a firm tracks their financial transactions, manage
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organisational performance and complies accounting data. By this, Alpha Ltd will be able
to resolve their financial conflicts in proper way (Tucker and Schaltegger, 2016).
 Benchmarking: It is defined as a management technique which helps an organisation in
gaining best practice out of available alternatives. This tool will help the organisation in
resolving issue of sudden expense. By adopting benchmarking, Alpha Ltd can measure
their services, practices and products against the market leaders to analyse those aspects
which leads to rise in expenses. Vertical benchmarking will help the organisation in
giving special emphasis to particular department whereas in horizontal bench-marking
main focus is given to the a specific activity or project.
 KPI: This is a measurable value which defines the efficiency of a firm to attain their
targets and objectives related with business. A company uses KPI in different situations
to analyse their success rate while performing business operations. KPI will help Alpha
Ltd in monitoring the progress towards business objectives with the assistance of strategy
map (Tucker and Lawson, 2016).
Comparison between Alpha Ltd and Rowlinson Knitwear
Alpha Ltd Rowlinson Knitwear
 This organisation is facing the financial
issue related with sudden expenses. To
overcome this situation, concerned
company has used cost accountancy
method. This method helps the
organisation in analysing total
expenditure of resources and material
that will be used in manufacturing. Due
to this, problem of sudden expense can
be resolved.
 Credit policy of company is weak due
to which customers are not paying back
the taken amount in timely manner. To
resolve this situation, price optimisation
system can be utilised so that right price
can be charged by the product. Due to
this, customers will pay on time and
issue of late payment will be resolved.
 Company is using KPI so that they can
strategically formulate policy to include
all the expenses related with
manufacturing. By this, problem of
 Benchmarking is utilised by the
company to resolve their financial
problem. By learning the policies of
other companies, problem of late
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sudden expenses can be resolved
appropriately.
payment can be overcome.
M4 Evaluate how, in responding to financial problems, management accounting can lead
organisations to sustainable success
In order to resolve their financial problems and conflicts, organisation is using KPI and
Bench-marking. These tools help the company in managing their sudden expenditures and issues
of receiving late payment in a proper manner. Also, to achieve sustainable success, company has
adopted financial governance due to which each activity is carried out systematically so that
extra expenses can be reduced and profitability can be maximised. By adopting flexible policies,
financial problems can be eliminated properly (Schaltegger, 2018).
D3 Evaluate how planning tools for accounting respond appropriately to solving financial
problems to lead organisations to sustainable success
Main planning tool which are used in an organisation are flexible budget, master budget,
zero based budget etc. All of these planning tools plays a considerable role in resolving the
financial conflicts of firm. These tools manage the budgetary control and budget of firm in
proper manner. Due to this, financial resources are used in optimal manner and issues related
with finances are avoided significantly. Each planning tools has a distinct role in the working of
company. These roles helps in overcoming issues like sudden expenditure and untimely payment
by customers due to which overall sustainable success is gained (Nuhu, Baird and
Appuhamilage, 2017).
CONCLUSION
In accordance with discussed assignment, this has been comprehended that management
accounting is very essential for a company to check and monitor their accounts on regular basis.
Different reports and methods of management accountancy permit an organisation to perform
accounts related work in a systematic manner. Main accounting method are job order system,
inventory administration method, price improvement etc. these systems are used in integrated
manner with reports like Budget report, inventory report etc. so that organisational work can be
performed in efficient manner. By using marginal and absorption costing, accurate financial
17

statements can be formulated. Various planning tools like zero based budget, master budget,
sales budget etc. helps in creating and forecasting budget. By using tools like benchmarking,
financial governance and KPI, finance related issues of a firm can be resolved efficiently.
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