Management Accounting Analysis: Systems, Reports, and Financials

This report provides a comprehensive analysis of management accounting practices within Alpha Ltd., a UK-based pizza company. It delves into various management accounting systems, including cost accounting, price optimization, job costing, and inventory management, highlighting their benefits and applications. The report examines key management accounting reports such as budget reports, inventory management reports, and cost accounting reports, assessing their role in decision-making. Furthermore, it explores different costing methods, specifically marginal and absorption costing, and prepares financial statements to illustrate their impact on net profit. The report also includes a reconciliation of net income under both costing methods, along with calculations of the profit/volume ratio and break-even point. Overall, the report offers valuable insights into the application of management accounting principles for effective financial analysis and decision-making within a business context.

MANAGEMENT
ACCOUNTING
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INTRODUCTION
Management accounting is the practice which helps the managers to identify, measure,
analyse and interpret the financial information which have been provided by the financial
department of the company. The reports of the managerial accounting are used for the internal
purpose which helps in identifying key areas and related decisions. With the help of various
reports and system of the management accounting the supervisors of the companies identifies
various strategies which can help them in achieving the organisational goals. Elements of the
management accounting are used by the managers to execute and undertake the difficult tasks
with the aim to improve the productivity of the company (Damayanthi and Gooneratne, 2017).
For this report the company that is taken into consideration is Alpha which was established in
2001. It is a UK based company that provides better quality pizza to the customers. In this report
various management accounting system, reports, framework are taken into consideration. Also
financial statement will be prepared on the basis of marginal and absorption costing. Apart from
this, various financial issues faced by the companies at the workplace will be considered and
along with that various planning tools will be analysed which helps in forecasting and
formulation of the budget.
TASK 1
P1)
Management accounting is the process that helps the companies to analyse the cost of the
business and the operations. It helps in formulation of various reports such as internal financial
reports on the basis of which the management take various decisions for the company. The
management accounting is considered to be a crucial system as it helps the managers to identify
various activities of the organisation (Anderson, 2016). Management accounting system are
considered as the internal system which can be used by the management to identify and evaluate
the processes. In context of Alpha Ltd., various management accounting system are taken into
consideration which will help in achieving the productive results. Some of the management
accounting system are given below:
 Cost accounting system: It is considered to be one of the crucial managerial accounting
system as the system facilitate an organisation to determine the cost of the product and
services offered by them. On the basis of such determination the profitability of the
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organisation, cost control and inventory valuation can be done. With the help of the
system the entire cost of the Alpha can be divided into various categories such as related
to direct material, labour, overheads. According to this the manager of the company can
plan strategies that can help them to reduce the cost and to manage resources efficiently
 Price optimisation system: Price Optimisation system helps the organisation to
determine the prices and the opinion of the customers towards the prices of the product so
offered by the company. On the basis of this system the managers at Alpha can determine
the prices of the product and services offered by them by analysing the reactions of the
customer. Further it can help the organisation in preparing and developing the structure of
the price which includes promotional pricing, discount pricing and initial pricing. This
system allows the company to enhance their income by analysing and deciding the prices
that can maximize their sales and revenue (Berry, Broadbent and Otley, 2016).
 Job costing system: The job costing system is the one that facilitates to allocate the total
cost to different activities or the job undertaken by the company. In this system, the
Alpha determines all the cost associated with specific production. Such cost is then
further divided into various activities. In job costing system, the information about
various materials, labour and overheads are considered which is then allocated among all
the activities by the managers (Cohen and Karatzimas, 2016)
 Inventory management system: For every manufacturing company to have an efficient
inventory management system is necessary. It helps the organisation supervise and
manage the inventory in an efficient and effective manner by managing the flow of
inventory to the organisation and flow of finished goods to the point of sale. Various
methods can be used by Alpha to effectively manage their inventory and their valuation.
Some of the methods which can be used by the company are LIFO, FIFO and AVCO. In
LIFO method, the unit which is purchase at the last by the company is sold first as they
believe that the last procured inventory is highly priced than the previous one. In FIFO
framework, the inventory which is procured first by the company has to be sold first.
While in AVCO framework, average cost of the products are considered while
estimation. Out of all the three, FIFO Framework is most suitable as the product which is
sold by the company belongs to food industry in which first has to be sold first (Carlsson-
Wall and Kraus, 2015)
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P2)
There are various management accounting reports that are prepared by the company which
help their managers to analyse their performance, decision making and to identify the changes
which day have to make as per the situation. Such reports are prepared for a specific period of
time which can vary from organisation to organisation. Some of the management Accounting
reports are given below which can be used by Alpha ltd.:
 Budget reports: Budget report is considered to be one of the most important reports as it
identifies all the expenses which an organisation has to be bear and the revenues which
they can earn. The budget is prepared for a specific period of time on the basis of past
experiences of the company. These budget reports can be used by the managers and the
supervisors of Alpha to provide incentives to their employees which will motivate them
to achieve their targets. Budget reports are effective for small businesses as in large
business it is not feasible to determine all the expenses and revenue.
 Inventory management report: Inventory management report is generally prepared by
the companies who are engaged in manufacturing process. It helps the organisation to
identify the cost which is involved in the manufacturing process. In this the cost of raw
material, different overhead expenses which are incurred for ordering the resources etc.
are considered. Such report can easily be modified by the managers of Alpha on the basis
of the inventory held by the company (Harritz, 2016).
 Account Receivable Aging report: It is a critical management accounting report which
helps the organisation to manage the cash flow of the company by managing account
receivables which facilitate them to decide the extend of credit to the customers. With the
help of this report the managers at Alpha can determine the issues in the collection
process of the company. If a large number of customers are unable to pay the due amount
then the company need to tighten their credit policies (Ionescu, 2017). Such reports are
prepared time to time which facilitate the company to overlook the debts of the company.
 Cost accounting report: This is the report which is essential to prepare by an
organisation in order to identify the deviations in desired and actual cost incurred in
execution of different business operation. This will be useful to adopt by Alpha due to
engaging in manufacturing sector where decision of allocating cost and maintaining
records of cost is more crucial. Preparing this report will ease manager to make accurate
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decision regarding allocation of cost after proper analysing the cost previously incurred
by company in past years for the similar project.
M1)
Systems Benefits
Job costing system It is beneficial for the company as it helps them to identify all the
cost such as cost of material, labour and overheads for a
particular job or activity. This system will make the Alpha
efficient to determine the cost for particular job and to eliminate
the activities which are non-essential for the company.
Inventory management
system
With the help of this system the Alpha can easily manage their
level of inventory and their valuation through LIFI, FIFO
methods. This system facilitates to determine the level of stock
which is hold by the company and in what quantity they can
procure. It will ensure the organisation that they neither have
excess stock nor they face the issue of shortage (Januszewski and
Kujawski 2016).
Cost accounting system This system identifies the total cost for the Alpha including all
the elements and it facilitate to break down the total production
cost with the help of the company can identify which cost they
have to reduce so that they can make their process efficient.
Price optimising system This system will facilitate the Alpha Ltd. to determine the prices
and the perception of the customers towards the prices of the
company. It will help them to identify the prices and the sales
which they have to make to achieve their organisational
objectives.
D1)
With the management accounting systems, reports are prepared which helps the company
in decision making and to identify various non-essential activities which they can eliminate to
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reduce the cost. But it increases the cost of the company as they have to appoint various
professional for the preparation of the reports. Also it makes the procedure lengthy which delays
in decision making. The integration of both the system and reports facilitate effective analysis
and decision making.
TASK 2
P3)
Cost is the value that the company has to bear to produce goods and services. It is concern
with valuation of the efforts, utilities, time, resources which has been used the production of the
goods. The cost can be classified into various categories as per their nature such as direct cost,
indirect cost, variable cost etc. Alpha Ltd. incurs higher cost of manufacturing and production
by way of procuring raw material, equipments and services (Loeb, 2015). For preparing the
income statement the two costing approaches that can be used by the company are:
 Marginal costing: It is a technique of costing which includes only the variable cost and
ignores the fixed cost while estimating the total cost. This increases amount of profit and
revenue in the reports but it is just reflect the variable cost. It is considered to be relevant
technique as variable cost is allocated to the units manufactured but the fixed cost has to
be written off to the aggregate contribution. It is used by small and medium sized
organisation as using such method increases the figures of profit in final records which
enable them to attract new investors to provide them financial help for profitable return in
future.
 Absorption costing: The method of costing is absorption costing which includes both
variable and fixed cost, also it gives precise view of all the expenses and cost that has
been incurred by the company in the process of manufacturing. This is the common
technique which is been used by the organisations in determining the actual cost of
manufacturing (Nitzl and Hirsch 2016). This method is used by large companies as it will
include variable and fixed cost which decreases the figures of net profit but shows actual
financial position through their final statements. This can ease company to retain their
loyal shareholders for longer period of time.
Net profit calculation using marginal costing method:
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Calculation of Net profit using absorption costing method
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Reconciliation of Net Income under Absorption and Marginal Costing
a) Before installation of the new machine
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b) After installation of the new machine
P/V Ratio = (Contribution Margin p.u./
Sales Price p.u.)*100 65
BEP from P/V Ratio 640000
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M2)
In the organisation various methods of accounting are used by the managers which help
them to identify the profits. With the help of such methods the managers of the organisation
evaluate, record and control the transactions of the company so that the efficiency can be
maintained. Alpha considered the absorption costing method and marginal costing method which
helps them to identify the both fixed cost and variable cost. This makes the decisions of the
company efficient.
D2)
With the help of financial reports, the company gather all the financial information related
with the tasks, transactions, inflows etc. These reports are presented to the stakeholders of the
company with which they identify the future course of action of the company. On the basis of the
financial reports of the Alpha Ltd it is identified that in the month of the May and June the
company has earned the highest profits. The profits with the help of absorption costing for the
month of May is 1050 £ while of June is 9792.4 £. Whereas the company faced losses as per the
marginal costing which is May of 550 £ but in June they earned a profit of 5750 £.
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