Management Accounting System and Its Application for KEF Ltd Report

This report provides a comprehensive overview of management accounting systems and their application within a manufacturing context, specifically referencing KEF Ltd. It explores various management accounting systems like inventory management, price optimization, and job costing, highlighting their importance in strategic decision-making. The report details different reporting methods, including budgeting and cost accounting reports. It includes practical cost analysis using absorption and marginal costing techniques, demonstrating the computation of production costs, cost of sales, and profit and loss statements. Furthermore, the report examines the advantages and disadvantages of planning tools used in budgetary control and discusses how organizations adapt management accounting systems to address financial problems. The report concludes by emphasizing the role of management accounting in providing accurate, reliable, and timely information for managerial personnel.

Management
Accounting System
and its Application

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1. - Management accounting and essential requirement of various type of management
accounting systems:................................................................................................................3
P2. - Different kind of methods used in respect of management accounting reporting:........5
TASK 2............................................................................................................................................6
P3. - Computation of costs applying appropriate cost analysis techniques to formulate income
statement applying absorption and marginal costing:............................................................6
TASK 3............................................................................................................................................9
P4. - Disadvantages and advantages of different planning tools applied in budgetary control:. 9
TASK 4..........................................................................................................................................11
P5. - In which manner organisation are adapting management accounting systems to respond
to different financial problems:............................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting is popular field of accounting which deals with preparation of
various accounts and reports and main motive is to provide accurate, reliable and timely
information for managerial personnels to take major strategic decisions. Planning tool and
methods help managers to identify and solve financial and monetary problems on early basis
(Stechemesser and Guenther, 2012). This report mainly try to emphasises on various aspects of
management accounting system and essential requirement of various management accounting
systems, methods of management accounting systems and planning tool along with benefits and
disadvantages of different planning tools in the context of KEF Ltd, a medium sized
manufacturing company. This report also contains practical calculation of costs using absorption
and marginal costing, and manner in which management accounting system assist in responding
to financial problems.
TASK 1
P1. - Management accounting and essential requirement of various type of management
accounting systems:
Management Accounting denotes to a organised and managed process of producing
relevant financial information and reports for managerial use. Moreover, top management by
applying such report and information formulates effective strategies in order to attain
organisation's targets and objectives. The management accounting considers different types of
accounting system like cost accounting system. Price optimisation system and inventory
management system. Information generated by management accounting systems are key
financial and accounting data that is directly or indirectly provide assistance to managerial
personnels in strategic planning and actions (Cazier and et.al., 2015). As KEF Ltd is
manufacturing company so different production managers provide relevant information
generated through systems of management accounting to top management for business decision-
making. Following are the main management accounting systems, as follows:
 Inventory management system: It is a system which emphasises on managing and
maintaining inventories within a business organisation to optimise the cost of inventories.
This system is used by management to enhance accountability and efficiency in
management of inventories (Burritt and Tingey-Holyoak, 2012). As KEF Ltd is a

manufacturing company, so here inventories includes WIP, raw materials, processed
goods, spare tools and finished goods. In order to manage all kind of inventories within
company heads of different production and manufacturing depart applying inventory
management system. inventory management system help to maintain the records of
inventory that solve financial problems. If KEF Ltd uses inventory accounting system
that can get the information of products and services and what need to be place order for
purchasing the goods. Under this system managers put their efforts identification,
classification, recording and monitoring of inventories to assess the actual cost
inventories in production and manufacturing activities. This system help managers to
asses the excessive inventories cost and minimise such cost to increaser probability
margin.
 Price Optimisation System: It is a systematic set of activities related to determining
most considerable and appropriate price of product and services. In this system of
management accounting a unique relationship between price of product or service and
demand is analysed by business organisation to set a effective price at which demand of
product is high. Price optimisation system help to utilize the prices of products and
services that leads to maintain the profits. Production and division managers in KEF Ltd
analyse the response of customer and market by setting different price of products during
a specific period of time. Here main motive is to reduce price while retaining same profit
margin.
 Job Costing System: This system is adopted by organisation which produce product on
specific customer order. Under this system each specific product is considered as job. In
this system is cost is assigned or allocated to each particular task or job. In KEF Ltd this
system is used for products which are totally different from production line. Manager first
classifies such product as task or job, thereafter they allocate different cost to this
participate task or job. Main purpose or objectives of this system is to increase
accountability within company (Marr and Gray, 2012). Following are the key information
that is required for job costing system:
Direct Material: In KEF Ltd, managers first classifies the cost of direct material involved in
production of different products as its is required to allocate cost of direct material to particular
task or job.

Direct Labour: This is also significant information that is used by production managers to asses
the total direct labour cost associated with particular job or task.
 Cost Accounting System: This system mainly focus on profitability analysis by
estimating and projecting cost of particular product or services. This system includes
activities like recording , summarizing, classifying and analysing various costs and
expenses related to production and manufacturing to control cost. Under this system
managers put their efforts towards controlling costs in order to maximise profitability. In
KEF Ltd cost accountants and production managers with help of this system try to
optimise cost of products to increase their profit margin. Here main objectives is effective
management and monitoring of costs to achieve organisation objectives and goals. These
system help to solve financial problem within organisation that also help to maintain the
profitability.
P2. - Different kind of methods used in respect of management accounting reporting:
Reporting is systematic process under which information is transferred from lower or
middle managers to top management through various formal reports. In Management accounting
reporting various reports are prepared by managers to report vital matter to top management in
order to assist them in managerial decision making process. By using these reports management
frames new strategies and plan to attain predetermined objectives. In KEF Ltd, following
management accounting reporting are used by managerial personnels, as follows:
 Budgeting or Budget Reports: Budgeting refers to making projection of cost and
expenses for assessment of future performance of business organisation. Various budget
reports are prepared by managers as per organisation's specific requirement. Budget
report help top managers to analyse the various financial aspects and performance
(Mook, 2013). In KEF Ltd, various budget reports are prepared by managers like sales
budget, purchase budget, cash budget etc. In Company management use this report to
identify and asses the issues and problems related to manufacturing of products, which
ultimately leads to increase in productivity. This process help to save the cost of
organisation and increase the productivity and profitability by using this system.
 Cost accounting reports- These reports provide a detailed assessment of cost of various
products produced and manufactured by business organisation. This report also provides

information of costs related to different activities and functions. Main motive of this
reporting system is to asses the cost of each product and identification of any
unproductive cost. In KEF Ltd, cost accountant prepare cost reports to provide a setailed
assessment of cost which ultimately used by management and production department to
take decision regarding manufacturing and production. These reports are also used by
management for optimisation of various costs.
 Inventory reports- Inventory reports are prepared by business organisation to track the
actual fluctuation in inventories in terms of value and number of item. This report is used
by business organisations to monitor various inventories like raw material, finished
goods, work in progress, spare tools etc (Hoque, Covaleski and Gooneratne, 2013). In
KEF Ltd these reports are prepared by production managers to monitor the movement of
various inventories within business organisation. It also assist management in effective
management of inventories to enhance accountability. In KEF, managers using inventory
report also identifies and eliminates inventory costs like storage costs, inventories
handling costs etc.
TASK 2
P3. - Computation of costs applying appropriate cost analysis techniques to formulate income
statement applying absorption and marginal costing:
(i) Production cost per unit:
Particulars Amount (in £)
Direct Expenses:
Material 12
Labour 20
Other variable production overheads 8
Total fixed production overhead cost =
£120000 (120000/20000) = 6
Use standard volume of 20000 units to absorb
the fixed production overhead cost
Selling price per unit: £60
Absorption Costing = £46/unit
Thus production cost per unit is £ 46.

Particulars Amount (in £)
Direct Expenses:
Material 12
Labour 20
Other variable production overheads 8
Marginal Costing = £40/unit
Thus production cost per unit is £ 40.
(ii)Total production cost:
Absorption costing:
Particulars
Per
Unit
cost
(in £ )
Total
amount(in £)
Direct Expenses:
Material 12 18000 x 12 216000
Labor. 20 18000 x 20 360000
Variable pro. overheads. 8 18000 x 8 144000
Fixed overheads. (FO) 6 18000 x 6 108000
Total production cost 46 18000 x 46 828000
Thus aggregate amount of production cost is £ 828000.
Marginal costing:
Particulars Per
Unit
cost (in
£ )
Total
amount(in £)
Direct Expenses:
Material 12 18000 x 12 216000
Labor. 20 18000 x 20 360000
Variable pro. overheads. 8 18000 x 8 144000
Total production cost 40 18000 x 40 720000
Thus aggregate amount of production cost is £ 720000.
(iii) Aggregate cost of sales in respect of June:

Absorption costing:
Particulars
Amount (in
£)
Aggregate production cost 828000
Opening stock 0
Closing stock -92000
Aggregate cost of sales for month
of June 736000
Marginal costing:
Particulars Amount (in
£)
Aggregate production cost 720000
Opening stock 0
Closing stock -80000
Aggregate cost of sales for month
of June
640000
(iv) Budgeted profit and loss statements.
Marginal Costing: This is kind of cost calculation method in which all fixed costs are
regarded as period or time cost and variable expenses such as direct labour, direct material costs,
variable production overheads and direct expenses are directly charged to each cost of units.
Under this method fixed costs is remain unchanged with change in volume of production.
Income statement prepared using this method is used by management for decision-making.
Absorption Costing: Under this method of costing all production costs whether variable
and fixed are charged to cost of product. Just opposite to marginal method here all fixed costs are
not considered as period cost (Schaltegger, 2012).
Profit and loss account by absorption costing method for month of June:
Particulars
Per Unit
Cost Total Amount
(In £)
Amount of revenue (16000 x 60) 60 960000
Cost Of Production:
Direct Expenses:
Material 12 216000
Labour 20 360000

Variable Pro. Overhead 8 144000
Fixed Pro. Overhead) 6 108000
46 828000
Opening Stock or Inventory
Closing Stock or Inventory -92000
Cost Of Sales (828000 less 92000) -736000
Standard Profit 224000
Adjustments For Under Absorption -10000
Net Profit 214000
Profit and loss account using marginal costing method in respect of month of June:
Particulars Per Unit Total
£ £ £ £
Amount of revenue (16000*60) 60 960000
Cost Of Production:
Direct expense:
Material 12 216000
Labour 20 360000
Variable Pro. Overhead 8 144000
40 720000
Opening inventory or stock 0
Closing inventory or stock -80000
Cost Of Sales (684000 less 80000) 35 640000
Contribution Amount 15 320000
Fixed Pro. Overhead -120000
Net Profit 200000
Preparation of final account after June
Absorption costing:
Particulars Per Unit Total Amount
£ £ £ £
Amount of revenue (19000 x 60) 60 1140000
Cost Of Production:
Direct Expenses:
Material 12 228000
Labour 20 380000
Variable Pro. Overhead 8 152000
Fixed Pro. Overhead 6 114000
46 874000

Opening Inventory or Stock 0
Closing Inventory or Stock -138000
Cost Of Sales (874000 less 138000) 40 -736000
Standard Profit 10 404000
Adjustment For Under Absorption -5000
Net Profit 399000
Marginal costing:
Particulars Per
Unit
Tota
l
Amo
unt
£ £ £ £
Amount of revenue (19000 x 60) 60 1140000
Cost Of Production:
Direct Expenses:
Material 12 228000
Labour 20 380000
Variable Pro. Overhead 8 152000
40 760000
Opening Inventory or Stock 0
Closing Inventory or Stock -120000
Cost Of Sales (874000 less 138000) 40 -640000
Contribution Amount 10 500000
Fixed Pro. Overhead -120000
Net Profit 380000
TASK 3
P4. - Disadvantages and advantages of different planning tools applied in budgetary control:
Planning tools are beneficial which help to control the financial issues within
organisation. It involves different types of planning tools such as fixed budget, budget and
flexible budget etc. These budget help to maintain the income and expenditure to overcome the
problems. It provides a specific structure that can be used to get solution of problems. Such as

KEF Ltd are using fixed and flexible budget to solve the financial problems that leads to
organisational success.
Budgetary control- The budgetary control can be defined as a kind of controlling technique
which is related with the management of actual performance. In this, manager of companies
assign the monetary and non monetary goals. On the basis of it, organisations compares the
actual performance (McVay, Kennedy and Fullerton, 2016). So overall, the budgetary control is
useful in managing the financial and non financial performance of organisations. Herein, below
some planning tools of budgetary control are mentioned below:
 Static budget- The static budget is also known by the fixed budget. Eventually, the fixed
budget is a kind of budget which can be update or change if sales changes. The KEF
company can use this budget for small manufacturing projects. Herein , below advantages
and disadvantages are mentioned below:
Advantages- The key benefit of this budget is that it is easy and simple to use.
Disadvantage- Main drawback of this budget is that it does not provide the facility of changing
the budget.
 Flexible budget- As name assists, the flexible budget is a type of budget that can be
change when sales change. Due to this budget companies can make update whenever the
need. Basically, the KEF manufacturing company apply this budget for long time
duration so that they can make change if sales increase or decrease. Advantages and
disadvantages of this budget are mentioned below:
Advantages- The common advantage of this budget is that users can update it whenever they
want.
Disadvantage- The disadvantage of this budget is that due to more changes it increases
complexity.
 Zero based budget (ZBB)- The zero based budget is a type of budget which is prepared
on the basis of justifying each activity. It eliminates those activities which are not useful.
As well as this budget does not include the information of past year's budget. Apart from
these features, this budget has some advantages and disadvantage which are mentioned
below:
Advantages- The main benefit of this budget is that it provides accurate and reliable information
because each activity has the justification.

Disadvantage- The main disadvantage of the zero based budget is that it takes too much time and
cost. As well as it is not affordable for small companies.
 Budget- This is the estimation of income and expenditures for a particular time period.
Under this, manager of company compares their actual result with the budgeted
performance (Myers, 2013). It has some advantages and disadvantages which are as
follows:
Advantage- The main advantage of this budget is that company can measure their actual
performance.
Disadvantage- The drawback of the budget is that estimation of income and expenditure can be
wrong.
TASK 4
P5. - In which manner organisation are adapting management accounting systems to respond to
different financial problems:
Every organisation should follow the effective management accounting system that help
to make plan accordingly. Management accounting system help to understand the financial
problems and maintain the profitability within organisation. Financial problems are the serious
issues for organisation. This may reduce the profitability of organisation and find the ways to
solve these problems (Sánchez-Matamoros, Araujo Pinzon and Alvarez-Dardet Espejo, 2014).
Organisation fare facing different type of financial issues that should be solve by managers by
following the accounting system. These system help to get the deviation and take corrective
action and assures effective and efficient management system. Different types of financial
problems are defined as:
Spending more than income: This is common issues that create financial problems in
organisation. It is a kind of issue which arises when spendings are more than incomes. Due to
this, organisation's profits decreases and loss increases.
Unequal cash flow: When cash flow of company does not match with its inflow then
financial problem arises. When organisation does not keep records of all transaction then
financial problems arises within organisation. This problem leads to lack of working capital.
Methods to deduct the financial problems: