Management Accounting Report: Eastern Engineering Co. Ltd. Analysis

This report delves into the application of management accounting techniques for Eastern Engineering Co. Ltd., an Oxfordshire-based catering industry entity. The report, prepared for Pearl Chartered Accountants, explores the integration of Management Accounting Systems (MAS) with Management Accounting (MA) reports, highlighting the benefits of various accounting systems such as cost accounting, price optimization, job costing, and inventory management. It further examines the importance of integrating these systems for effective financial tracking and decision-making. The report then analyzes different methods of management accounting reporting, including budget reports, accounts receivable reports, inventory management reports, and performance reports. Additionally, the report provides a cost analysis using absorption and marginal costing techniques and prepares income statements for both methods, explaining the differences in outcomes. The analysis includes detailed calculations and comparisons, providing a comprehensive overview of management accounting practices.

Management
Accounting

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
TASK 2............................................................................................................................................6
TASK 3............................................................................................................................................8
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting can be explained as an approach of identifying and summarizing
financial information or data which facilitates effective decision making by managers of an
organization. Hence, it is utilized by internal team of an entity. Management accounting refers to
a way of distinguishing, deciphering, imparting as well as examining information related to
financial activities (Aouni, McGillis and Abdulkarim, 2017). This report is based on examination
of management accounting techniques for Eastern engineering co. ltd. Entity is based in
Oxfordshire and serves in an industry of catering. It has approached Pearl Chartered
Accountants, which helps businesses in various aspects such as, accounting taxation and
strategies for business growth for the purpose of getting advice on management accounting
systems.
This report covers evaluation and understanding for systems of management accounting.
Application of techniques for management accounting are analysed. Further, planning tools that
is utilised in management accounting are demonstrated and lastly, use of management
accounting by organizations as a response to problems related to finance is compared.
TASK 1
Integration of MAS with MA reports.
The term management accounting systems and reports refers to the alignment of corporate
structures with financial accounting and reports. This is attributed to the fact that each division
has its own responsibilities and divisions where a multitude of activities are carried out. For
example, in order to track total expenditures and sales, above Eastern engineering co. Limited’s
financial system is connected to a cost accounting scheme and a cost document. Comparably, to
deal with challenges in the manufacture and sale of products and services, the storage department
uses a stock control scheme. This feature demonstrates that there is a strong link between MAS
and MA documents and operational structure.
Benefits of MAS:
Accounting system Importance
Cost accounting system This is advantageous for businesses in order to cope with various
types of costs that arise over time. In the case of Eastern
engineering co. limited, their financial manager employs the use
1

of these an accounting scheme to deal with those operations that
result in higher costs.
Price optimization system It is necessary in order to set pricing at a level where consumers
can be pleased. This method is used by the above organization to
determine rates on their services, and it is achieved based on
customer reviews.
Job costing system This accounting scheme is used by Eastern engineering co.
limited to determine the expense of each object or entity over a
specific accounting period.
Inventory management
system
This is useful for controlling manufacturing costs and leading
management in the buying and sale of raw resources. Eastern
engineering co. limited, for example, uses such an accounting
scheme to make decisions on selling and buying various
products.
Why it is important to integrate management accounting systems within an organization?
Management accounting systems comprises of internal systems of business that enables
measurement and evaluation of financial transactions of an enterprise for the purpose of effective
management of organizational processes (Bedford and Speklé, 2018). Therefore, it can be stated
that systems of management accounting facilitate tracking of financial data related to business
which fosters analysis of performance of Eastern engineering co. ltd. It provides critical
information to managers of a firm to be utilised for effective decision-making of business.
management accounting systems are of different types, which are demonstrated below with its
essential requirements:
Cost accounting system: It enables estimation of costs incurred in a business, and value of
products of an organization for the purpose of profitability analysis and cost control. Cost
accounting system is an important technique for ascertaining profit and costs of an enterprise. It
is applied for assessing actual cost which is associated with manufacturing of goods and
providing services by an organization.
2

Essential requirements: Cost accounting system pertains following essential requirements:
 Utilization of cost accounting system facilitates estimation of all costs which incurs in
Eastern engineering co. ltd.
 Tracking and monitoring of costs by this framework helps in identification as well as
elimination of unnecessary costs, hence, profitability of an organization improves.
 It is designed with a motive of monitoring expenses that incurs in a business and
incorporates systematic procedure that enables recording as well as reporting of
information related to expenditures. It fosters managers to formulate effective strategies
and enhance efficiency of Eastern engineering co. ltd.
Inventory management system: This system is applied for tracking level of stock in a
business, along with analysing sales, deliveries as well as orders. It ensures effective monitoring
of inventory position of Eastern engineering co. ltd. Hence, this tool facilitates organization of
data related to inventories (Cokins, 2016).
Essential requirements: Following are some essential requirements of inventory management
systems:
 Inventory management system helps in minimizing chances if overstocking and
understocking. Overstocking leads to increment in business expenses as costs related to
maintenance of stock increases. On the other hand, understocking hinders operations of
business.
 It simplifies management of inventories of Eastern engineering co. ltd. and therefore,
ensures enhancement in productivity.
 It consists an array of processes of internal management which fosters automation of
tasks related to inventory management.
Job costing system: This system fosters accumulation of information related to costs which
is associated with service job as well as specific production. Such type of information is required
for tracking costs of each job of Eastern engineering co. ltd. It includes approximation of costs
related to three primary aspects, materials, labour as well as overhead.
Essential requirements: Various essential requirements of job costing system are described
below:
 It allows assessment of costs related to each job which helps in determination of profit
margin that is associated with specific business processes.
3

 It provides accessibility to business management for formulation and development of
effective strategies that enhances activities of cost control in Eastern engineering co. ltd.
 Apart from it, job costing system allows continuous monitoring of business processes. It
facilitates identification of potential issues of an enterprise, which can be managed
adequately by managing team of an entity.
Price optimisation system: This system of management accounting enables calculation of
variations in demand of customers due to fluctuations in level of price. In other words, price
optimization system analysis response of customers at different level of price in relation to
products or services of Eastern engineering co. ltd.
Essential requirements: Following are some essential requirements which are associated with
incorporation of price optimisation system in Eastern engineering co. ltd.:
 Price optimization system helps in implementation of effective pricing strategy as per
demand of customers.
 It enables alignment between expectation of customers and profitability of business.
 Hence, sustainability and profit earning capacity of Eastern engineering co. ltd. improves
with the application of price optimization system of management accounting.
Explanation of various methods that are used for reporting of management accounting:
Management accounting reports is a technique of displaying financial status of an
organization over a period of time. It complies information of business related to finance
(GOVDYA and KHROMOVA, 2018). It is prepared with a motive of informing managers of
Eastern engineering co. ltd. in context to financial data of an enterprise. It ensures formulation of
effective strategies and making of informed decisions by managers of business. it emphasizes
internal information related to funds that is utilised for planning, regulation, decision-making as
well as performance measurement. Management accounting reports are analysed by managers of
a firm for enhancing profit earning capacity and productivity of an enterprise. Different types of
management accounting reports are explained below:
 Budget reports: It indicates an internal report that compares estimated or budgeted
projections of revenue or expenses of an enterprise with its actual level of performance
during a time period. Preparation of budget report in Eastern engineering co. ltd. helps in
determining and controlling high expenditures which ultimately leads to improvisation of
4

company’s profitability. Overall, this report entails comparison for performance of
business along with estimations of company. hence, any loopholes or drawbacks can be
identified and eliminated.
 Accounts receivable reports: This report of management accounting plays a crucial role
in fostering activities of enhancing productivity of an organization by providing an
overview of balances of business related to credit. Monitoring of credit balances or
accounts receivable of business is essential for formulating effective credit policies that
aligns with payment capabilities of customers and requirements of business. application
of technique of preparing management accounting report helps in minimizing risks of bad
debts (Hoozée and Mitchell, 2018). This report records unpaid balances of debtors along
with duration which helps Eastern engineering co. ltd. in keeping track of customer debts
and improves organization of finance in an entity.
 Inventory management reports: Preparation of this report facilitates with a snapshot of
inventory position of an enterprise at a specific time period. It provides summary of
existing or available stock in a company. In context to Eastern engineering co. ltd.,
computation of inventory management report ensures maintenance of safety stock, on-
time ordering of inventory so that processes of business are not hindered due to
unavailability of stock. Apart from it, this report of management accounting helps in
avoiding overstocking, i.e., a reason for expense increment related to maintenance of
unnecessary inventory. In addition to it, preparation of inventory management report
ensures evaluation of average lead time that is required by suppliers which fosters
adequate stock ordering as per organizational requirements. Overall, this report fosters
production efficiency of Eastern engineering co. ltd.
 Performance reports: This management accounting report states expectations of
business performance which enables comparison of actual performance with the
estimated one (Hyndman, 2016). In relevance to Eastern engineering co. ltd., it is created
for the purpose of reviewing performance of an organization which is helpful for
formulating effective key strategic decisions regarding future growth and development.
Preparation of performance report enables analysis of current business situations and
fosters effective governance of a firm. It improvises accountability and productivity of
Eastern engineering co. ltd.
5

TASK 2
P3: Calculation of costs by utilising appropriate techniques for cost analysis for preparing
income statement by using marginal as well as absorption costs:
Cost analysis refers to a procedure of analysing costs that are associated with various
elements of business (Kumarasiri, 2017). In relevance to Eastern engineering co. ltd., there are
mainly two purpose of conducting cost analysis, i.e., internal reporting and external reporting.
Former indicates utilization of technique of cost analysis by internal team of management of an
enterprise for understanding and evaluating cost of business operations. While, later states
utilization of cost analysis by external users of business for analysing efficiency of a company.
1. Income statement under absorption costing:
Absorption costing: It is a technique of accumulating costs which is associated with
manufacturing of a product. This method of costing allocates fixed costs to each output unit in a
period of time. It ensures accurate accounting as it analysis fixed as well as variable costs (Libby
and Salterio, 2019).
January February
Variable production cost £450,000.00 £517,500.00
Fixed production cost £320,000.00 £368,000.00
Total cost £770,000.00 £885,500.00
Per unit cost £77.00 £77.00
Income statement:
Particulars January February
Sales £1,323,000.00 £1,568,000.00
Less: Cost of sales £754,600.00 £862,400.00
Variable production cost £450,000.00 £517,500.00
Fixed production cost £320,000.00 £368,000.00
Closing stock £15,400.00 £38,500.00
Opening stock £0.00 £15,400.00
Gross profit £568,400.00 £705,600.00
6

Less/add: Over/under absorption of fixed
cost £32,000.00 £16,000.00
Net profit £600,400.00 £689,600.00
2. Why there is difference between marginal and absorption costing outcomes.
Marginal costing: It refers to a technique in which costs which are variable are charged to
per unit costs while fixed costs is written off against aggregate contribution. Hence,
marginal costing evaluates change in relation to total costs of business when quantity of
production is increased by one. In other words, it implies additional costs which is involved
in production of additional output unit. This costing technique helps managers of Eastern
engineering co. ltd. in ascertaining appropriate activity level by evaluating variable costs of
business.
January February
Variable production cost £450,000.00 £517,500.00
Per unit cost £45.00 £45.00
Income statement January February
Sales £1,323,000.00 £1,568,000.00
Less: Marginal cost of sales £441,000.00 £504,000.00
Variable production cost £450,000.00 £517,500.00
Closing stock £9,000.00 £22,500.00
Opening stock £0.00 £9,000.00
Contribution £882,000.00 £1,064,000.00
Less: Fixed production cost £350,000.00 £340,000.00
Net income £532,000.00 £724,000.00
The cost consideration in both methods is the explanation for the disparity in the generated result
under absorption and marginal costing. Only contingent costs are known as commodity costs in
7

marginal cost. Both discretionary and fixed costs are regarded as part of the cost of the goods in
absorption pricing.
3. Interpretation:
According to the above-mentioned results, there is a substantial discrepancy between the income
statement under marginal and absorption costing. The net benefit for January and February is
£532,000.00 and £724,000.00, respectively, according to marginal costing. When in absorption,
the costs were £600,400.00 and £689,600.00 for the months in question.
TASK 3
How planning tools help to solve issues.
There are various types of strategy tools that are useful in addressing problems. This is feasible
because each budget provides an accurate revenue and cost forecast that serves as a basis for
forecasting potential financial operations. They used various strategy techniques, much as they
did in the case of the previous business.
Evaluation of advantages and disadvantages associated with various planning tools for budgetary
control:
Budget can be elaborated as an estimation of expenditures as well as revenue of a particular
time period. Budgetary control refers to a procedure of preparing budgets for future time period.
It helps in comparing actual performance of business with estimated performance. It fosters
identification of factors which are required to be improvised and helps management team to take
corrective actions for the same (OTLEY, 2019). Objectives of implementing budgetary control
techniques in Eastern engineering co. ltd. is to align business performance with its goal. Further,
budgetary control provides planning of effective strategies for performance enhancement. There
are various planning tools of budgetary control which are discussed below:
Cash budget: This budget comprises estimated cash receipts as well as disbursements at
a specific time period. It involves revenue which is collected or earned in business, expenditures
which are incurred, as well as receipts or payments of loan. Hence, cash budget can be stated as
an estimated projection for future cash position of Eastern engineering co. ltd.
8

 Advantages: It helps in determining cash position of business. further, computation of
cash budget in Eastern engineering co. ltd. proves to be of great help in preventing
chances of overspending and eliminates unnecessary costs of business.
 Disadvantages: Cash budget lacks flexibility and apart from it, interior manipulations of
a company pertain negative influence on profitability of an organization. In relation to
Eastern engineering co. ltd., cash budgeting technique is totally relied on estimations for
future sales, expenses as well as collections. Hence, it can be stated that it is based on
instincts instead of facts as it is not necessary that sales or expenses incur asper
estimations.
Operating budget: It contains expenses as well as revenues which is generated from
daily operations of business. it concentrates on operating expenses which involves costs of
product sold. Operating budget showcase projected revenue as well as associated expenditures of
a Eastern engineering co. ltd. for future period of time.
 Advantages: Formulation of operating budget helps in managing current expenses of an
enterprise. Apart from it, this planning tool of budget facilitates projection of future
expenses. Hence, preparation of operating budget enables alignment of business
expenditures with actual organizational requirements. Apart from it, this budget increases
accountability of Eastern engineering co. ltd. and helps in building financial reserves but
cutting overspending.
 Disadvantages: It lead to rigid decision making by managers which is not an appropriate
approach for gaining sustainability in this constantly evolving dynamic era. Apart from it,
while considering disadvantages of operating budget it can be noted that it is a time
consuming procedure.
Capital budget: This budgetary planning tool analysis receipts as well as payment
related to capital of business. It is utilised for the purpose of determining purchase decision
related to proposed fixed assets (Rozhkova, Blinova and Rozhkova, 2017). Capital budget is
utilised for creating a quantitative view for investment decisions, thereby providing rational basis
for judgement.
 Advantages: Capital budgeting helps management team of a company in understanding
risk which is associated with an opportunity related to investment and its effect on return
of an organization. In case of Eastern engineering co. ltd., it fosters strategic investment
9

of firm for long term. Application of capital budgeting tool ensures choosing of wise
investment which enhances efficiency of a company
 Disadvantages: Decisions related to capital budgeting are for long period of time and its
nature is majorly irreversible. Non-financial aspects of an organization are ignored while
conducting a capital budget.
Production budget: It facilitate computation of number of units that is required to be
manufactured. It is derived by forecasting and planning for inventory that must be kept as a
safety stock in an organization. Overall, adding of forecasted unit of sales along with planned
safety stock provides total unit of production that is required in Eastern engineering co. ltd..
 Advantages: Computation of production budget facilitates optimum utilisation of
resources. Apart from it, production budget ensures reduction is costs which incurs in an
activity of production or manufacturing in Eastern engineering co. ltd..
 Disadvantages: One of the major potential issue which is associated with computation of
production budget is that it hinders efficiency of production operations. Further, this
process is time consuming.
Sales budget: This budgetary tool showcase resources that is required to be allocated by
an enterprise for the purpose of achieving sales that is forecasted. Hence, main purpose
associated with preparation of sales budget maximum utilisation of available resources in
alignment to attaining of organizational goals, i.e., set objectives of Eastern engineering co. ltd..
 Advantages: Computation of sales budget fosters growth and development of an
organization as efficiency of Eastern engineering co. ltd. in generating sales, which is a
source of revenue earning, improvises with preparation of this budget.
 Disadvantages: Preparation and modification of sales budget is a time consuming
approach and failure in attainment of goals of sales budget leads to a factor of
demotivation for working staff.
Comparing how businesses are adapting systems of management accounting for responding to
financial problems:
Financial problems can be demonstrated as issue related to fund that is faced by an
organization (Saeidi and Othman, 2017). Financial issues which are faced by Eastern engineering
co. ltd. are described below:
10

 Overstocking: It indicates a situation when company has ordered high amount of
inventory from suppliers in comparison to requirements of business. It leads to increment
in costs of Eastern engineering co. ltd.. High expenditure: Increment in expenses of an organization leads to decrement in its
profitability. Hence, incorporation of high costs is a major issue which is required to be
addressed.
Monitoring tools:
KPI: Key performance indicator demonstrate effectiveness of an enterprise for
achievement of key objectives of business. This technique overviews progress of Eastern
engineering co. ltd. towards set objectives.
Benchmarking: It tool of monitoring facilitates comparison of processes as well as
performance of an entity with other company (Tucker and Leach, 2017). it helps ion measuring
success of Eastern engineering co. ltd. and ensures discovery of any gap or loopholes that
hinders success of business.
Financial governance: It indicates way in which financial information of an organization
is collected, managed, monitored and controlled. It helps in tracking of financial transactions and
ensures management as well as compliance of financial data.
Eastern engineering co. ltd. Clerkenwell Green
Financial issue related to overstocking is faced
by Eastern engineering co. ltd.. Over stocking
serves as a reason for increasing costs of a
company in relation to maintenance and
storage of inventory. This problem can be
solved with application of inventory
management system. This system tracks level
of inventory in a company which helps
management team in avoiding issues related to
overstocking and understocking.
Company faces issue related to late payment by
debtors. It pertains negative influence on cash
flow of Clerkenwell Green. Monitoring
approach of benchmarking is helpful for
solving this financial issue. As, benchmarking
provides overview of credit policies adopted by
another entity for ensuring on-time receiving of
credits. Further, cost accounting system is a
suitable approach for tracking level of cash
flow in business.
Another problem related to finance which is
faced by entity is involvement of high
Inability in aligning prices of products or
services of Clerkenwell Green with
11

expenditures. High expenses lead to reduction
in profit earning capacity of Eastern
engineering co. ltd.. Job costing is best suitable
system for reducing expenditure of business.
This system facilitates tracking of costs
associated with each job or process of an
organization. Hence, unnecessary expenses can
be identified and tracked.
expectations of customers is a critical financial
issue which is faced by an entity. This problem
can be solved with implementation of price
optimisation system. It determines fluctuations
in demand of customers through variations in
product prices.
Application of benchmarking technique helps
entity in resolving issues related to cash
management. As, this technique enables
comparison with entities which are performing
well.
Key performance indicators enables
identification of loopholes and areas of
improvement that leads to enhancement of
efficiency level of an enterprise.
Role of MAS to solve financial issues.
Different types of MAS are important in resolving financial problems. For example, in the
preceding section, two firms are contrasted in order to resolve issues using a product
optimization scheme and a cost accounting system. Both accounting schemes aided their
respective businesses in resolving disputes in less time and at a lower cost.
CONCLUSION
From the above report it can be concluded that management accounting fosters
supervision of business operations and helps in accomplishment of organizational goals. In other
words, management accounting facilitates measurement of overall operational strategy within a
business. Various types of management accounting systems are, cost accounting, inventory
management, job costing and price optimisation. Further, performance, budget, inventory
management and accounts receivable are different types of management accounting reports.
Various planning tools that is utilised for budgetary control are capital budget, cash budget, sales
budget, operating budget and production budget.
12

REFERENCES
Books and Journals:
Aouni, B., McGillis, S. and Abdulkarim, M. E., 2017. Goal programming model for management
accounting and auditing: a new typology. Annals of Operations Research. 251(1-2). pp.
41-54.
Bedford, D. S. and Speklé, R. F., 2018. Constructs in survey-based management accounting and
control research: An inventory from 1996 to 2015. Journal of Management Accounting
Research. 30(2). pp. 269-322.
Cokins, G., 2016. The top seven trends in management accounting. Edpacs. 53(4). pp. 1-7.
GOVDYA, V. and KHROMOVA, I., 2018. Methodical Aspects of the Decomposition Approach
to the Formation of the Managerial Cost Accounting System in the Organizations of the
Russian Agroindustrial Complex. Journal of Applied Economic Sciences. 13(3).
Hoozée, S. and Mitchell, F., 2018. Who influences the design of management accounting
systems? An exploratory study. Australian Accounting Review. 28(3). pp. 374-390.
Hyndman, N., 2016. Accrual accounting, politicians and the UK—with the benefit of
hindsight. Public Money & Management. 36(7). pp. 477-479.
Kumarasiri, J., 2017. Stakeholder pressure on carbon emissions: strategies and the use of
management accounting. Australasian Journal of Environmental Management. 24(4). pp.
339-354.
Libby, T. and Salterio, S. E., 2019. Deception in management accounting experimental
research:“A tricky issue” revisited. Journal of Management Accounting Research. 31(2).
pp. 143-158.
OTLEY, D. T., 2019. THE CONTINGENCY THEORY OF MANAGEMENT ACCOUNTING.
ACHIEVEMENT AND PROGNOSIS. Management Control Theory. 5(4). p. 305.
Rozhkova, N., Blinova, U. and Rozhkova, D., 2017, December. The concept of management
accounting based on the information technologies application. In International
Conference on Information Technology Science (pp. 89-95). Springer, Cham.
Saeidi, S. P. and Othman, M. S. H., 2017. The mediating role of process and product innovation
in the relationship between environmental management accounting and firm's financial
performance. International Journal of Business Innovation and Research. 14(4). pp. 421-
438.
Tucker, B. P. and Leach, M., 2017. Learning from the experience of others: Lessons on the
research–practice gap in management accounting–A nursing perspective. In Advances in
Management Accounting. Emerald Publishing Limited.
13