Management Accounting Report: Analysis of BAM Construction Limited

This report provides a comprehensive analysis of management accounting principles and their application within BAM Construction Limited, a civil engineering company. It defines management accounting, differentiating it from financial accounting, and emphasizes its importance for internal decision-making and strategic planning. The report explores various management accounting systems (MAS), including price optimization, job costing, inventory management, and cost accounting, detailing their functions and relevance to the company's operations. It also examines different types of management accounting reports, such as inventory reports, cost accounting reports, performance reports, and accounts receivable aging reports, highlighting their significance for internal stakeholders. The report further discusses the advantages of MAS and their integration with company processes, using BAM Construction as a case study. Practical examples include the preparation of profit statements under marginal and absorption costing principles and the application of different costing methods, such as labor hour absorption rate and activity-based costing. The report concludes with a practical demonstration of how management accounting techniques are used to produce financial reports and solve monetary issues.

MANAGEMENT
ACCOUNTING

INTRODUCTION
The MA is as significance as financial accounting. It can be defined as a different part of
accounting in that internal reports are prepared for internal stakeholders (Cooper, 2017). These
reports can be prepared only by this accounting because it consists monetary and non monetary
information. In today's context mostly organisations are implementing this accounting because of
its increasing importance. With the use of it, managers of companies can evaluate the actual
financial performance that helps in preparing competitive strategies and plans as well as in
major decision making. For better understanding of it, BAM construction limited company is
selected which is basically a civil engineering company. It is located in London and deals in
small, large construction projects. The project report contains two activities in which, first
activity describes about management accounting systems and reports as well as income statement
is produced as per given information. Further, in second activity planning tools and role of MA
systems to solve the monetary issues is included. Along with solution of given practical parts is
mentioned.
ACTIVITY 1
PART (A)
Management accounting and essential requirement of different accounting method.
Types of MAS:
 Price optimisation system- This is a part of management accounting that is related to
sales department of companies. It is so because this provides a detailed information
regarding to consumer's feedback at different price (Jacobs, 2012). With the help of it
companies can fix price of produced items on that customers can be satisfy. Such as
above BAM construction limited company, they operate in wide range of construction
projects and they determine the expected price of their civil engineering projects with the
help of it. This helps them a lot because as per their customer's reaction on various prices
they set the estimated price. Hence, it is essential for companies to draw an effective
pricing pattern which can benefit to companies as well as can satisfy the customers.

 Job costing system- This is associated with finance department of companies (Guthrie,
Parker, 2014). In this, various cost such as labour cost, material cost etc. are estimated
and calculated. By implementation of this organisations can assess the total cost of their
various kind of jobs allocated to multiple operations. Such as in BAM construction
limited company, there are vital range of labour cost, material cost etc. All these costs are
being managed by above accounting system. So overall, this is essential to companies for
proper management of cost in the various operations.
 Inventory management system-In this system, a detailed track record of various kind of
stocks like WIP stock, raw material, finished commodities etc. is included. Along with
under it, the information related to how much quantity of material is consumed and how
much is remaining. On the basis of it, companies' production department takes crucial
decisions. Herein, the context of above selected, BAM construction limited company
their contractors use this accounting that helps them in effective allocation of raw
material in construction projects. It is essentially required in organisations for two
purposes which are keeping track record of materials as well as for taking important
decision in relation to production and purchasing.
 Cost accounting system- This is associated with finance department of companies
(Mussnig, 2013). In other words, this accounting system forecast and calculate actual
amount of cost that occur in multiple operations. The primary objective is to keep total
cost of various activities under control as much as possible. With the effective
implementation it, organisations can evaluate about how much cost will be occurred in
production of one unit and on the basis of it they try to keep below forecasted amount.
Such as in the BAM construction limited company, their finance department is using this
accounting system to track the difference between actual and estimated cost. Thus, this
accounting system is essentially required by companies to keep the cost below budgeted
cost.
Various kind of MA reporting.
MA reports are written document which are prepared as per the organisation's
quantitative and qualitative transactions of a fixed time period (Harrison and Lock, 2017). These
reports are being used by managers of companies as they take important decisions on the basis it.

Additionally, these reports are presented only to the internal aspects of companies not to
external parties. BAM construction limited company, their management accountant produces
different types of reports to help their managers and some of them are mentioned below:
 Inventory reports- In these reports information regarding to quantitative aspects of
various kind of stock including prepared goods, WIP is included (Evans, Burritt and
Guthrie, 2013). This type of report is very important for production department because
with the help of it, they manage entire production process. The importance of this report
is not limited till the production department but also it is useful for minimising the cost of
storing the materials in warehouses. Such as in the BAM construction limited company,
their accountant is preparing this report which includes information related of raw
material like cement, iron, concrete etc. for compilation of any civil project.
 Cost accounting report- This is a report which is linked with finance department. This is
so because in it, information related to the cost of each activity is included. Its importance
can not be ignored by companies because in the absence of it they will not be able to
forecast total cost as well as actual occurred cost. Such as in the above BAM construction
limited company, their management accountant produce this report which helps in
evaluating cost of different civil engineering projects. In addition, on the basis of it, they
make estimation of their projects.
 Performance report- It is prepared on basis of aspect of performance of various aspects
such as estimated financial goal and actual performance (Schaltegger and Zvezdov,
2015). As well as it is aligned with evaluation of actual position of company in front of
stakeholders. In addition, this helps to managers in determining efficiency of their
employees separately. Such as in above company, they are preparing this report for
managing the financial performance of different engineering projects. Along with this
report is almost necessary for them to prepare just because they are engaged in dealing
large construction projects. With the help of it, they assess the growth of their projects.
Apart from it, this report is not limited till the financial performance of projects but also it
evaluates performance of employees separately.
 Account receivable ageing report- This may be defined as a kind of report which is
prepared by accountant to help the finance department so that it can be evaluated that
how much amount is due and overdue by debtors. By use of it, organisations can make

their financial plan for future activities because on the basis of it they can assess total
expected fund which is required to collect from debtors. In above organisation, they are
preparing this report with an objective to analyse their debtors. In addition companies can
identify those debtors who do not make payment even after the expected date. It overall
helps in computing the total payable interest amount by debtors.
Advantage of MAS and their application in context of companies.
Each type of management accounting has some importance in the aspect of companies. It
depends on organisations that how they use these accounting systems to get benefit. Such as in
the above company, they have implemented multi-pal types of accounting systems whose
importance are as:
 Importance of cost accounting system- This accounting system has its importance for
finance department of any type of organisation (Soltes, 2014). It is so because by this
companies can allocate their funds in a better way so that expenditures can be eliminated.
Along with, by assessing useful from this accounting system managers can get reliable
information regarding to each units' cost. Like in the BAM construction, this is benefiting
them in management of cost of their various construction projects.
 Importance of price optimisation system- It has its importance in the context of sales
department of any kind of company. This is so because firstly it gather customer's
opinion on price segments and after that determines prices of products & services. Apart
from it, if companies do not apply this accounting system in their operations then it may
lead to decrease in total sales units. Like in the chosen company, they estimate the price
of their construction projects with help of it. In addition, it is also helping them for better
satisfaction of their customers because if they will provide products and services on
affordable prices.
 Importance of inventory management system- This is beneficial for companies because it
is linked with production department. With the help of it organisations can assess the
need of material for further. In the BAM construction limited company, they manage
their inventories such as iron, cement, concrete, bricks, stones etc. with the help of it.
 Importance of job costing system- This helps in assessing cost of job which is aligned in
different operations. Basically, the key benefit of above accounting system is to offering

complete information to managers of companies about each activity's cost. As
accordance, they prepare their plans and strategies which are implemented into current
operations and activities. Herein, this is important to know that it is useful for those
business entities wherein different units are produced. In BAM construction limited, they
trace the cost of various job like labour, supervisors in any construction project.
Integration of MAS and reporting with process of companies.
The integration of both MAS and reporting is linked to the process of companies (Sisaye
and Birnberg, 2012). It is so because each type of MAS and reporting has link with the various
department of organisations. Such as in the above BAM construction limited company, different
types of MA like cost accounting system is aligned to finance department for proper allocation of
funds. As well as price optimisation system is linked to the sales department and inventory
management system with production department. It stats that systems of MA is aligned with the
organisational process. While MA reports, like cost accounting reports have interrelation with
evaluation of financial position as well as other reports also aligned with other activities of above
company. So MAS and MA reports are integrated within company's process.
PART(B)
ANNEX(A)
Question 2.
(A) Profit statements under marginal costing principles:
Marginal costing- Under this costing system, profit statements are prepared by taking fixed cost
as periodic expenses (Sedevich Fons, 2012). While variable cost as cost of product.
1) 1st quarter (contribution & profit/loss)

(B) Profit statements under absorption costing principles:
Absorption costing- Under this costing system, fixed and variable costs are considered as cost of
product and absorbed completely (Rankin, Stanton, McGowan, Ferlauto and Tilling, 2012).
1) 1st quarter gross profit and net profit/ loss:
Income statement by absorption costing method(1st quarter)
PARTICULARS
AMOUNT
(in £)
SALE (4500x95) 427500 427500
C.O.G.S. -231750
G.P 195750
UNDER/OVR ABSORPTION 6800
G.P. 202550
LESS- FIXED EXPENDITURE -45000
NET PROFIT 157550

2) 2nd quarter gross profit and net profit/ loss:
Income statement by absorption costing method(2nd quarter)
PARTICULAR
AMOUNT
(in £)
SALE (3000x95) 285000
COST OF GOOD SOLD -180250
G.P. 104750
Under ABSORPTION -5476
G.P. 99274
LESS- FIX EXPENDITURE -45000
NET PROFIT 54274
Working Note:

ANNEX(B)
Question 1.
(a) Conventional absorption costing using a labour hour absorption rate:
(a) Labour hour: -
Product X = £6000x1 = £6000
Product Y = £8000x2 = £16000
Labour hour = £2,64,000
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1x12 = 2x12
= 12 = 24
Total Overheads = £6000x12 = £8000x24
= £72,000 = £192,000
(b) Using activity based cost approach: -

Management accounting techniques to produce financial reports
MA techniques help in preparation of financial statements. Such as in the aspect of above
annex(a), income statements are prepared as per absorption and marginal costing. As well as in
annex (b) activity based approach and absorption hour rate is applied to compute given
problems. It shows that management accounting techniques are important to prepare various kind
of financial reports.
Interpretation of produced financial statements.

On the basis of above financial statements, it can be analysed that in annex(a) profit
statements are produced as per absorption and marginal costing techniques. On the basis of
marginal costing method, net profit is of £150750 according to marginal costing method. While
according to the absorption costing method, net profit is of £157550 for first quarter. Along with
in second quarter, net profit is of £54274. While, in annex(b), labour hour for product X and Y
is of £264000 and rate is of £12 per hour. Total overheads are of £72000 and 192000 for product
X and Y. Additionally, under activity based approach, total cost for product X is of £82749 and
for product Y is of £181255.
ACTIVITY 2
PART (A)
Benefits and drawbacks of planning tools.
This is a technique that manages financial progress of companies as per setting different
kind of budgets. In general, budgetary control consists a wide range of planning tools such as
cash budget, capital, static, variable budget etc.
 Capital budget- It is a budget which provide guidance to companies for making long term
investment as well as assess the effectiveness of huge capitalized projects. Such as the
BAM construction company deals in large construction projects and for them this budget
is very crucial. This is so because as per it, they evaluate the effectiveness of large capital
invested projects. As well as they take decisions about investment in large projects
according to this budget.
Advantage- It is beneficial for companies in understanding the different kind of risks
which involves in any project. Due to this organisations can make profitable decisions.
Disadvantage- This budget makes an estimation of future risks of investments but
sometimes estimation can be wrong. It is so because future is uncertain and any change in
economic condition can make estimation totally wrong.
 Operating budget- This is a kind of budget that contains completed information regarding
to the estimated revenues and expenses of different operations (Rieckhof, Bergmann and
Guenther, 2015). This budget is prepared by companies for a particular time segment.
The selected civil engineering company, BAM construction limited they allocate their