Nelson College HND Business: Management Accounting Report and Analysis

This report delves into the core concepts of management accounting, examining its significance in modern business operations. It analyzes various management accounting systems, including cost accounting, inventory management, and job costing, highlighting their roles in decision-making and strategic planning. The report explores tools used for management accounting and reporting, such as cost reports, budgets, and performance reports. It also compares marginal and absorption costing techniques, illustrating their application through income statement preparation. Furthermore, the report evaluates the merits and demerits of budgetary control tools and examines how companies employ management accounting systems to address financial challenges, providing insights into effective financial management practices and the importance of adapting to evolving business trends.

Management
Accounting

SUMMARY
In the following report, a detailed deliberation regarding the management accounting
concepts and merits and demerits of tools that are in use for management accounting systems is
done. During the course of this project report, it has been analysed that with the growing
business trend and increasing competency of the firms in every industry, application of
management accounting principles is extremely important to furnish useful information helpful
in decision-making and strategic policy formulation regarding business operations.

Table of Contents
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
P1 Management accounting system and paramount requirements of multiple types of
management accounting systems...........................................................................................4
P2 Tools used for management accounting & reporting.......................................................5
TASK 2............................................................................................................................................6
P3 Calculation of total costs using different techniques of allocation of cost to prepare income
statement.................................................................................................................................6
TASK 3............................................................................................................................................8
P4 Merits and demerits of various types of planning tools used for budgetary control.........8
TASK 4..........................................................................................................................................10
P5 Comparison of how different companies are using management accounting systems to
counter financial problems...................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is the concept of analysis and reporting income and
expenditures which an organisation earns and expends while operating in macro-environment.
The main objective of this report is to develop an understanding about the concepts of
management accounting (Kaplan and Atkinson, 2015). For this purpose, two companies are
consulted in this report which are Cooke Optics Ltd (Camera lens manufacturer) and Bulldog
Tools Ltd. (Gardening tools manufacturer). In this report, the concepts of management
accounting, necessary requirements of various types of management accounting systems,
different costing techniques, tools of budgetary control and adaption of management accounting
in countering financial problems are discussed.
TASK 1
P1 Management accounting system and paramount requirements of multiple types of
management accounting systems.
Management accounting is the process of application of professional skill and expertise in
using financial information in a way to assist the management in policy formulation and decision
making. Management accounting has the objective of using financial information and data for
taking a better and accurate decision related to the key operational areas of the organisation.
There exist many kinds of management accounting systems that are essential for any
organisation. Some of them are:
Cost accounting systems:
Cost accounting system is a tool which is used by the management to find the
approximate cost of its products for making decisions related to stock valuation, profit-analysis
and cost control (Obigbemi, 2013). Allocation of cost under cost accounting is either done on the
basis of activity-based costing or traditional methods of costing. Cost accounting helps the
management to determine the exact reason behind any unusual change in the profit which may
be due to a change in the cost of producing the goods.
Inventory management:
Inventory management is defined as the method of controlling the ordering, storage and
consumption of materials which are used by the organisation in the production of its goods.
Inventory management aims at providing the right stock, at the right time, at the right place

procured at the right cost (Parker, 2012). It aims to avoid overstock and understock situations.
Management of inventory helps the organisation in decreasing various costs associated to
inventory such as storage costs, cost of ordering and carrying cost.
Job costing system:
The process of allocation of manufacturing costs of an organisation to individual jobs of
production or batches of items is termed as job costing system. Generally, it is applied if the
manufactured goods are distinct from each other. Information derived out of job costing system
have multiple uses (Langevin and Mendoza, 2013). It may be used by the management for
estimating cost to quote prices for any particular order or the figures may be used to provide the
data related to costs to a customer for any contract under which costs are to be refunded.
Price optimisation systems:
Price optimisation models are mathematical tools used to determine the reaction of
customers at different price levels. It measures the effective demand in response to any change in
the prices by the organisation. Price optimisation is all about determining the perfect balance
between value and profit and since relative prices of goods and services keep changing, it is a
perpetual task for the management. It helps the management to determine the level of price at
which the organisation is able to fulfil its goals like maximising the revenue or profits.
P2 Tools used for management accounting & reporting.
Management accounting uses financial reports prepared by the accounts department as
well as other accounting reports that are furnished by the accountants for the internal use of
management for making decisions and policy formulation. Some of the reports are:
Cost reports:
Cost of the items that are manufactured is calculated under management accounting. All
the elements of cost like prices of raw material, direct wages, overheads related to production,
selling and administration costs, variable selling and fixed costs etcetera are taken into
consideration for the preparation of cost reports (Fullerton, Kennedy and Widener, 2014). It
assists the management to view the total cost incurred on production and selling of the product
and the selling price of the product. It helps in making decisions related to profit margins and
cost control.
Budgets:

Budget reports prepared under management accounting are very useful in measuring the
performance of the organisation. These budget reports act as standards or benchmarks against
which the actual performance of the company is evaluated and any discrepancies found therein
are analysed. Budget reports have the element of flexibility to change them in future as per the
changes in business environment of the organisation. Generally, each department prepares its
own budget and a master budget is prepared for the whole organisation keeping in mind the goals
and targets of the organisation (Datar and Rajan, 2018). These are prepared on the basis of
budgeted and actual reports of previous years and some changes are made accordingly. Budget
reports assist the management to evaluate the work of the employees and providing incentives.
Accounts receivable aging reports:
It is a critical tool for determining flow of cash in the business if the organisation is
involved extensively in granting credit purchases to its customers. Classification of customer
balances on the basis of the time period for which they have been due is made under this report.
It aids the management of the firm to evaluate the collection process of the organisation.
Performance reports:
Performance reports are prepared for each employee and every department and sub-
department that exist in the organisation for evaluation of actual performances against budgeted
standards. These reports are used by the management to make key strategic with respect to
operations of the organisation. Performance reports are also used as tool for self-evaluation.
TASK 2
P3 Calculation of total costs using different techniques of allocation of cost to prepare income
statement.
Marginal Costing:
Marginal costing is a technique of costing under which only marginal or per unit additional
cost is charged to the unit of cost and the fixed cost for that period is waived off completely
against the contribution.
Income Statement under Marginal Costing
Sales ( £30*50000 ) 1,500,000
Less: Variable Cost of Production
Direct Materials ( £8*50000 ) 400,000
Direct Labour ( £9*50000*20/60 ) 150,000
Manufacturing O/H ( £2*50000 ) 100,000

650,000
850,000
Less: Variable Selling Cost
Variable Sales O/H ( £4*50000 ) 200000 200000
Contribution : 650,000
Less: Fixed Production Costs 160,000
Less: Fixed Selling Costs 60000
Net Profit: 430,000
Total cost = Sales - Profit
= 1500000-430000 1070000
Cost per unit = 1070000/50000 21.4
Working Note:
Direct Manufacturing labour p/u: 20 mins
Units produced: 50000
Total labour mins: 50000*20 1000000
Total labour hours: 100000/60 1666.666667
Absorption costing:
Absorption costing is a technique of costing under which both marginal or per unit
additional cost and fixed costs of manufacturing a product is charged to the units of cost.
Income Statement under Absorption Costing
Sales ( £30*50000 ) 1,500,000
Less: Cost of Production
Variable Production Cost:
Direct Materials ( £8*50000 ) 400000
Direct Labour ( £9*50000*20/60 ) 150000
Manufacturing O/H ( £2*50000 ) 100,000
650,000
Fixed Production Costs: 160,000
810,000
Gross Profit: 690,000
Less: Selling and Administration Costs
Variable Sales O/H ( £4*50000 ) 200000

Fixed Selling Costs: 60000
260000 260000
Net Profit: 430,000
Total cost = Sales - Profit
= 1500000-430000 1070000
Cost per unit = 1070000/50000 21.4
Working Note:
Direct Manufacturing labour p/u: 20 mins
Units produced: 50000
Total labour mins: 50000*20 1000000
Total labour hours: 100000/60 1666.666667
Generally, there is a difference in the amount of net profit calculated under both the
methods because of different methods of valuation of closing stock. Closing stock is valued at
variable cost of production under marginal costing whereas under absorption costing, closing
stock is valued at total cost of production which includes both fixed as well as additional or
variable costs. However, in this case, the amount of net profit is same due to the absence of
closing stock.
From the above discussion, it is quite clear that absorption costing is a better approach for GSQ
limited. Absorption costing takes into consideration both additional costs of production as well
as fixed costs of production which helps the management to look at the total costs
comprehensively. Absorption costing is a better approach which helps in tracking profits more
accurately. However, marginal costing is more useful if the company has just started and the
objective is to find out contribution per unit and break-even point.
TASK 3
P4 Merits and demerits of various types of planning tools used for budgetary control.
Budgetary control is a tool which is used by the management in planning and controlling
the organisation’s key functions such as production and manufacturing of goods and services,
selling activities. procurement of raw materials etcetera (Drury, 2013). It helps in promoting

coordination and communication between departments, evaluation of performances, motivating
employees with the main objective of achieving the goals and targets of the organisation. Some
of the tools used for budgetary control are:
Financial budgets:
Financial budgets such as cash budget, budgets for asset-acquisition and statement of
financial position budgets are used by the management to forecast and determine the sources
from where it expects to meet its requirement of funds.
Advantages:
It provides vital help to the management in decision-making related to capital expenditure
projects and ascertaining that the firm is able to meet its working capital requirements.
Preparation of financial budgets ensure optimal allocation of scarce financial resources.
Disadvantages:
Financial budgets create an upper limit on every transaction that happens within an
organisation. These budgets are often perceived as tools of restriction used by the management to
control expenditure and resource allocation (Yalcin, 2012). Element of flexibility must be
included while preparation of these budgets.
Operating budgets:
Operating budgets are budgets that are prepared for carrying out the operations of
business such as manufacturing goods, selling activities and procurement of materials. It
showcases an organisation's expected revenue and expenditure for a certain period of time.
Advantages:
Operating budget act as a tool for the management to measure the performance of various
departments. It makes possible the comparison between the standard performance and the actual
performance.
Disadvantages:
Operating budgets are based on the forecasts made by the management after taking into
consideration the budgets for previous year. Thus, it is very difficult to trust the accuracy of these
budgets. Operating budget formulation increases the chances of inter-departmental conflicts
since the budget of each department is inter-connected.

TASK 4
P5 Comparison of how different companies are using management accounting systems to
counter financial problems.
Each organisation faces a lot of difficulties related to finance such as lack of funds,
increasing cost of production etcetera. The management of the company needs to find solutions
to these problems as soon as possible to sustain in the market and protect the organisation form
any negative impact of these problems. The role of management accounting is increasing in
responding to these financial problems (Marginson, 2013). Some of the tools of management
accounting that are being used to solve financial problems are:
Cost accounting and cost sheets:
Cost accounting provides vital information to the management with respect to the various
costs that are being incurred in the production, manufacturing and selling activities of the
business. This information facilitates decision-making and policy formulation by the
management.
Variance analysis:
Variance analysis refers to the process of investigating the deviations between the actual
performance and the budgeted or standard performance (Banerjee, 2012). It helps the
management to find out whether the activities of the organisation are directed towards achieving
the targets or goals that were set during the initial planning process.
Here is a comparison that shows how organisations implement the same management accounting
tool to counter to different financial problems:
Tool Cooke Optics Ltd. Bulldog Tools Ltd.
Cost accounting The company was recently
facing a financial problem of
reduced profit margins due to
increase in cost of production.
Company made use of cost
sheets to find the reason
behind the increasing cost.
After a brief analysis of the
Due to an intense competition,
the sales of the company were
on a declining rally. This lead
to a decrease in the profits and
scarcity of funds. Management
of the Bulldog Tools Ltd.
analysed the cost sheets to
calculate the current profit

cost sheet for different
periods, the management of
Cooke Optics Ltd. was able to
figure out that the reason
behind increasing total cost
was increased cost of raw
materials by the supplier and
started looking for alternate
options.
margin and offer a price lesser
than the competitor's price to
increase the sales.
Variance analysis The company uses the model
of variance analysis to make
sure that the products which
are being manufactured match
the standards of quality.
Quality of products has
proved to be the main reason
behind the increasing sales of
the company.
Bulldog Tools Ltd. implements
the model of variance analysis
for setting profit-targets. Any
differences between the actual
and the standard profit are
thoroughly analysed by the
management.
CONCLUSION
After going through the report, it has been inferred that management accounting is a very
important process of providing information related with the operations of the company to the
management for more informed decisions and policy formulation. Management accounting and
financial accounting are very different from each other. It can be concluded that while financial
accounting methods are used to ascertain the financial position of the organisation, management
accounting aims at providing aid to the management in managing and controlling the operations
of the organisation.

REFERENCES
Books & Journals
Banerjee, B., 2012. Financial policy and management accounting. PHI Learning Pvt. Ltd..
Datar, S.M. and Rajan, M., 2018. Horngren's Cost Accounting: A Managerial Emphasis.
Drury, C.M., 2013. Management and cost accounting. Springer.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting
practices. Journal of Operations Management. 32(7-8). pp.414-428.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Langevin, P. and Mendoza, C., 2013. How can management control system fairness reduce
managers’ unethical behaviours?. European Management Journal. 31(3). pp.209-222.
Marginson, D., 2013. Budgetary control: what’s been happening?. In The Routledge Companion
to Cost Management (pp. 21-43). Routledge.
Obigbemi, I.F., 2013. Employee Participation in Budgeting and Effective Budgetary Control a
Tool for Enhancing Organizational Performance. Tactful Management Research
Journal, 1.
Parker, L.D., 2012. Qualitative management accounting research: Assessing deliverables and
relevance. Critical perspectives on accounting. 23(1). pp.54-70.
Yalcin, S., 2012. Adoption and benefits of management accounting practices: an inter-country
comparison. Accounting in Europe. 9(1). pp.95-110.