Unit 5 Management Accounting Report: Financial Analysis

This report on management accounting explores key concepts, techniques, and applications. It begins by defining management accounting and its roles, emphasizing its importance in financial strategy formulation and expense monitoring. The report then delves into various management accounting systems, including inventory management, price optimization, and cost accounting. It also covers different methods of managerial accounting reports, such as budget reports and job cost reports, highlighting their advantages in reducing expenses, improving cash flow, and supporting business decisions. The second section focuses on cost analysis, differentiating between fixed, variable, direct, and indirect costs, along with various costing systems, including absorption, marginal, job, and process costing. The third section discusses the advantages and disadvantages of planning tools like budgeting, covering capital, operational, and financial budgets. The report concludes by examining how organizations can use management accounting to address financial problems, including benchmarking and the use of Key Performance Indicators (KPIs), emphasizing the required skills such as planning, decision-making, and leadership. The report is a comprehensive resource for understanding management accounting principles and their practical applications.

Management accounting

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Question-Answers
LO1- Management Accounting
Management Accounting is the procedure of maintaining management reports and accounts that
offer correct and timely financial information that is necessary by managers to take the decisions
such as short term or long terms decisions. The act of translating the financial data into the useful
information helps the managers and officers to take the decision (Business Dictionary, 2018).
Roles of Management Accounting
Management accounting plays the different role in the organization as it is essential to retain the
financial information. The role of management accounting is describing below:
Formulate Financial Strategies- Management accountants can frame financial strategies using;
sales forecasts, job costing techniques, and budgets. It has been seen that the organization
develop the strategies to improve the net profit, gross income, and earning per share. It is
essential for the organisation to analyses the financial data while developing the strategies for the
growth.
Monitor expenses- Gathering financial data of the organization in a single book helps to monitor
all the expenses and incomes.
Maintain Profitability- Company maintains its books and accounts due to which the
profitability of an organization will maintain (Chenhall, and Moers, 2015).

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Management Accounting System
Inventory Management System- In this system, all the transaction related to stock is recorded.
The activity of supply chain is also mentioned in the report as it helps to maintain the stock to
operate smoothly in the market.
Price Optimization System- In this system, the organization set the prices of delivering the
services to consumers.
Cost Accounting System- It is the system that is used by the manufacturing department in order
to record the production events by using the perpetual inventory system.
Job Costing System- In this system, the cost is allocated to the specific job or business involved
in it.
It has been seen that the different management systems have different role in the organization
that helps to operate smoothly in the market. It is essential for the organization to implement
these systems at the workplace to gain the advantage (Kaplan, and Atkinson, 2015).
Methods of managerial accounting reports
There are various ways in which the organization maintains their reports with the accurate
amount and these are as below:
Budget Report- Organisation can prepare the budget by collecting financial data as per the
financial funds. It is useful for the managers to control the cost of every department and reduces
the wastage.
Accounts Receivable Aging Reports- Organization can maintain the account receivable aging
report to uphold the cash flow statement for organisations that spread credits for their customers.

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Job Costs Report – The report contain the expenses of a specific project that helps to estimate
the revenue so that the organization can earns the profitability.
Inventory and Manufacturing – Organization that has the physical inventory can also maintain
the inventory and manufacturing report to create their manufacturing process efficient or
effective (Cooper, Ezzamel, and Qu, 2017).
Advantages of systems of management accounting with an organization
There are numerous assistances of system of management accounting that improves the
operations and overall profitability. The assistances of management accounting system are
discussed below:
Reduce expenses- Maintaining the management accounting report with the different systems
helps to maintain the balance between the expenses and revenues. Budget report of the
organization helps to allocate the cost as per the requirement of the departments due to which the
expenses will control.
Improve cash flows- It has been seen that the accounts receivable aging report is maintain that
supports to compare the cash flow statement. This system is mainly roll up into the company
total master budget that helps to save the money by analyzing the expenditure with the revenue.
Maintaining balance between the expenditure and revenue improves the cash flow statement of
the organization.
Business Decisions-

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Preparing the accounts and reports of management accounting supports the organization to take
the accurate decision. Management accounting assistances to analyses the quantitative with the
qualitative to take the decision appropriately (Thomas, 2016).
Increase Financial Returns
Management accounting also supports to prepare the financial forecasts in order to increase the
consumers demand and potential sales due to which the company financial returns is increases.
LO2- Techniques of Management Accounting
Evaluation of cost using suitable techniques of cost analysis
Cost- It is a monetary value that the organisation has spent in order to gain somewhat in return or
produce something. In the organization, cost symbolizes the money amount that the organisation
spends the amount in producing something (Labro, 2019).
Differentiation Classification Cost
There is various costs that are spent by the organization in order to producing something. These
are given below:
Fixed Cost- The cost that remains constant and cannot change with the change of output level
or sales revenue.
Variable Cost- It is the cost that can be differs from the production volume or services provided.
Direct Cost-The amount that can be spent on the production of specific goods or services.
Indirect Cost- Indirect Cost is the cost that is not straight liable to a cost object. It can be fixed
or variable in nature but particular overhead cost can be directly credited to a project.

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Material Cost- It is the cost of production material that can be easily found with the unit of
production. It can also be said that it is the cost of direct material.
Labor Cost- This cost includes the wages that are incurred while producing the goods or
delivering the specific services to consumers (Quattrone, 2016).
Different Costing System
There is various costing system that can be used by the organizations to assess the cost and these
are given below:
Absorption Costing System
Variable costing is the methodology which is only assigned the variable cost to inventory. In this
system, all overhead costs are considered as the expenses in the period while variable overhead
cost and direct material are allocated as an inventory of the organisation. It has been evaluated
that there is no uses of the variable costing in the financial reports since the accounting
frameworks implement at the workplace (Babu, and Masum, 2019).
Marginal Costing System
It is a cost that will incurred on one additional unit of output. It is used by the organisations to
evaluate the optimum production quantity. The company who operates the business within the
sweet spot helps to maximize the profits. This concept is used to measure the product pricing
which is essential for the organisation to measure the price while consumers request the lowest
possible price.
Job Costing System

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A job costing system contains the process of collecting the data that is relative to the cost of a
specific production or services. The data and facts gathered in this system is also used to evaluate
the accuracy of the valuing system of the organisation. This system is used to allocate the
inventoriable costs to manufactured goods (Labro, 2019).
Process Costing System
The process costing system supports to collect the cost when a huge number of matching units
are being shaped. It is the greatest efficient system to gather the costs that an aggregate level for
a great batch of products.
LO3- Uses of planning tools
Advantages and Disadvantages of planning tools that are used for budgetary control
Budget - Budget is a report in which the valuation of revenue and expenses is considered for a
specified future. The report is prepared on the periodic basis or for a specified period.
Budgetary control- It is a system of management control describes the situation in which the
actual incomes and spending amount are associated with the planned income and spending
amount in order to control the expense (Otley, 2016).
Different types of Budgets
There are numerous types of budget that are necessary to maintain by the organization in order to
earn the high profit. These are given below:
Capital Budget-Capital Budget is the procedure in which the organization evaluates the
expenses or investments that are huge in amount.

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Operational Budgeting- The Company estimated all the incomes and expenses that are rely on
the future estimation report for the given period of time.
Financial Budget- Financial budget is the process in which the assets, cash flow, incomes and
expenses are estimated that are used to managing the strategy (Cools, Stouthuysen, and Van den
Abbeele, 2017).
Advantage and Disadvantage of Budgeting
Advantages
Forecasting- Preparing budget not only supports the company to sustain the heavy expenses but
also helps to estimate the cost which will occur in the coming future. It is beneficial for the
organisation to forecast the cost in terms of saving the money.
Price setting- It has been seen that there are various budget reports that helps the organisation to
sustain the market position by setting the prices. The budget of the organisation is developed by
the company by analyzing the market condition such as by analyzing the competitor’s prices in
different parameters. The company analyses the different parameters such as fees, rates, and
prices. Set up prices in the process of budgeting helps to enjoy the competitive advantage in the
market (Arend, Zhao, Song, and Im, 2017).
Credit Procurement- There are various financial institutions that help the organisation in
monetary terms such as banks, suppliers, and the other lenders. These financial institutions
provide the money on credit by analyzing the financial situation of the organization. It is required
to prepare the budget to represent while borrowing the money on credit.
Disadvantages

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Blame for Outcomes- If a division does not receive the budget at the appropriate amount then
they blame to the other department budget in the monetary terms. It is observed that the conflicts
has been arises among the departments within the organization.
Time Consuming - It has been observed that the organisation prepare the budget by analyzing
the market condition and internal resources. The process of analyzing the market condition and
preparing the budget helps the organization but it consumes the high time.
Inaccurate estimation- It has been evaluated that the budget report is prepared as per the
expenses of different departments. It is observed that the estimated amounts of expenses are
inaccurate because sometimes departments require more money to invest that time budget report
will fail (Rajnoha, Štefko, Merková, and Dobrovič, 2016).
LO4- Comparison ways in which organizations could use management accounting to
respond to financial problems
Adoption of systems of management accounting in order to respond the financial problems
Benchmarking- It is a procedure of assessing the performance of products, processes, or
services with the other companies of the industry. It also helps the organization to analyses the
internal resources and capabilities for improvement (Castro, and Frazzon, 2017).
Key Benefits-
The process of Benchmarking is useful for the organisation in terms of profit and efficiency of
financial condition. The benefits are discussed below:
 It helps to improve the employee understanding towards the cost structure

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 It also encourages the team and builds the interest of becoming more competitive
 It enhances the performance of organization by analyzing or evaluating the opportunities.
Key Performance Indicators
It is a kind of tool that used to evaluate the performance. KPIs help to estimate the success of the
organization or an activity of the business in which they perform the services. It has been seen
that the selecting the right KPIs depend upon an understanding of importance of activities of the
organisation (Uyar, and Kuzey, 2016).
Management Accounting Skills required
Planning and Reporting-It is required to evaluate the future, measure performance and report
financial results. Planning and reporting is prepared by the organization that helps to evaluate the
financial statements.
Decision Making- It is required to guide to take the decision, manage risk and the others. The
skill of management accountant is used by the organisation to take the decision for the
development.
Leadership- It is required to collaborate and inspire the team to attain the organizational goal. It
is essential for the management accounting to have leadership skills in order to encourage the
team.
Technology – The management accountant should have the knowledge of technology manage
and information system to enable the effective operations.
Skills help to solve the financial problems

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Replacement -It has been seen that these skills helps the organisation to cut out the expenses or
implementing the changes to replace the large amount of expenses with the small amount of
expenses. Implementing the changes in the organisation helps to reduce the financial issues of
large expenses or enhancing the performance.
Expenses reduce- If a management accountant has the skills than he can reduce the expenses
because it helps to identify the areas that need some special attention. Budgeting report is the
process in which the organisation controls the expenses by estimating the cost for future. The
issue of facing heavy losses will be solved by reducing the expenses.
Increase spending Awareness- As discussed above, it has been seen that the leadership skill
helps to encourage the team in order to perform well in their services. Spreading awareness
among the team helps to reduce the cost of operating the business because team members invest
less amount to manufacture the product. It helps to prevent the organisation from the financial
problems by investing fewer amounts in operating activities.
Creating plan or budget- It is observed that the creating plan or budget helps the organisation
to solve the financial problems. Generating a plan for spending the money for a month is the
smartest thing that helps to aware the departments to invest the money in an appropriate manner.
System of management accounting can lead organization to sustainable success in order to
respond to financial problems
The main purpose of management accounting is to offer the information to management in order
to take the appropriate decision towards the organisation. In the case of financial problems, it has
been seen that the organisation requires the information or the details from which they can use to
address the financial issues. Management accounting is the processes in which the different

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reports are maintain to get the whole information or financial data of the organisation (Maas,
Schaltegger, and Crutzen, 2016). These reports help to gather the information that can be used by
the organisation to resolve the financial problems.
Nowadays, it is required for the organisations to develop the business strategies, models and
practices to overcome the challenges of social, environmental while creating the financial
success and developing the values of shareholders. The management report of the organisation
states that how numerous business units have disappeared into the valuable intelligences.
Management accounting report represents the business entities that have disappeared into the
appreciated intelligences and analysis in order to gain the accountability capabilities. It includes
the analysis of business environment or social factors that affects the development of the
organisation and its performance in financial terms (Groesser, and Jovy, 2016). The
organisations mainly face the issues just because of respondent and management that do not
consider the data or facts while taking the decision.
Forecasting the cash flows- Forecasting the cash flow helps to calculate the upcoming cash
surpluses or shortages. The information helps the organisation to take the right choices for future.
The various decisions can take the organisation by using or estimating the future cost of the cash
flows such as tax preparation, planning new equipment’s purchases or finding the financial areas
to secure the small business loan. Management accounting report helps to forecast the cash flow
as it gathered the all cash transactions. The organisation can also use the estimating information
for an upcoming business change or decision.
Management accounts reports are used in many ways to guide the companies to attain the
success:

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 This report helps to elaborate the influence of these constancy issues in terms of strong
business.
 The report helps to find environmental and social factors that affect the company
capability to make the value over time.
 It helps the organisation to face the business challenges by developing the business
strategy, model, performance overview and licensing license.
 It is utilizing the administrative accounting tools or techniques like life cycle cost, and
carbon footprint, natural resources gain and the others in order to assist the combining
matters in decision making procedure (Malmi, 2016).

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References
Arend, R.J., Zhao, Y.L., Song, M. and Im, S. (2017) Strategic planning as a complex and
enabling managerial tool. Strategic Management Journal, 38(8), pp.1741-1752.
Argenti, J. (2018) Practical corporate planning. Routledge.
Babu, M.A. and Masum, M.H. (2019) Crucial Factors for the Implementation of Activity-Based
Costing System: A Comprehensive Study of Bangladesh. ABC Research Alert, 7(1).
Business Dictionary. (2018) Management accounting. [online] Available from:
http://www.businessdictionary.com/definition/management-accounting.html [Accessed
11/07/19].
Castro, V.F.D. and Frazzon, E.M. (2017) Benchmarking of best practices: an overview of the
academic literature. Benchmarking: an international journal, 24(3), pp.750-774.
Chenhall, R.H. and Moers, F. (2015) The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and society,
47, pp.1-13.
Cools, M., Stouthuysen, K. and Van den Abbeele, A. (2017) Management control for stimulating
different types of creativity: The role of budgets. Journal of Management Accounting Research,
29(3), pp.1-21.
Cooper, D.J., Ezzamel, M. and Qu, S.Q. (2017) Popularizing a management accounting idea:
The case of the balanced scorecard. Contemporary Accounting Research, 34(2), pp.991-1025.
Groesser, S.N. and Jovy, N. (2016) Business model analysis using computational modeling: A
strategy tool for exploration and decision-making. Journal of Management Control, 27(1),
pp.61-88.
Kaplan, R.S. and Atkinson, A.A. (2015) Advanced management accounting. PHI Learning.

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Labro, E. (2019) Costing Systems. Foundations and Trends® in Accounting, 13(3-4), pp.267-
404.
Maas, K., Schaltegger, S. and Crutzen, N. (2016) Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production, 136, pp.237-
248.
Malmi, T. (2016) Managerialist studies in management accounting: 1990–2014. Management
Accounting Research, 31, pp.31-44.
Otley, D. (2016) The contingency theory of management accounting and control: 1980–2014.
Management accounting research, 31, pp.45-62.
Quattrone, P. (2016) Management accounting goes digital: Will the move make it wiser?.
Management Accounting Research, 31, pp.118-122.
Rajnoha, R., Štefko, R., Merková, M. and Dobrovič, J. (2016) Business intelligence as a key
information and knowledge tool for strategic business performance management. E+ M
Ekonomie a Management.
Schaltegger, S. and Burritt, R. (2017) Contemporary environmental accounting: issues, concepts
and practice. Routledge.
Thomas, T.F. (2016) Motivating revisions of management accounting systems: An examination
of organizational goals and accounting feedback. Accounting, Organizations and Society, 53,
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cost system design and performance?. Advances in accounting, 35, pp.170-176.

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Appendix
Working 1- Calculate full production cost
Ksh ‘000’
Direct materials 8
Direct labor 5
Variable production overheads 3
Fixed production overheads [Ksh 4,000 /400 units] 10
Full production cost 26
Particulars May June
Production of Product A 500 380
Sales of Product A
(units)
300
500
Closing Inventory 200 80
Working 2- Calculate value of inventory and
production
Opening inventory
Productio
n
Closing
inventory
Ksh ‘000’ Ksh ‘000’ Ksh ‘000’
May 0 13000 5200

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June 5200 9880 2080
Working 3-Under/over absorbed fixed production overhead
May June
Ksh ‘000’ Ksh ‘000’
Actual fixed prod o/h 4000 4000
Fixed o/h absorbed 5000 3800
-1000 200
over absorbed under absorbed
Absorption costing profit statement
May May June June
Ksh
‘000’ Ksh ‘000’ Ksh ‘000’ Ksh ‘000’
Sales 15000 25000
Less cost of sales
Opening inventory (w2) 0 5200
Production (w2) 13000 9880
Closing inventory (w2) -5200 -7800 -2080 -13000
Fixed Period 1000 -200
Gross Profit 8200 11800

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Less expenses
Variable sales commission 750 1250
Fixed administration 2000 2000
Fixed selling 4000 -6750 4000 -7250
Net profit 1450 4550
Marginal Costing
Working 1: Calculate the variable production cost
Ksh ‘000’
Direct materials 8
Direct labour 5
Variable production o/h’s 3
Variable production cost 16
Working 2: Calculate value of inventory and
production
Opening
inventory
Producti
on
Closing
inventory
Ksh ‘000’
Ksh
‘000’ Ksh ‘000’
May 0 8000 3200
June 3200 6080 1280

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Marginal costing profit statement
May May June June
Ksh ‘000’ Ksh ‘000’ Ksh ‘000’ Ksh ‘000’
Sales
Less cost of sales 15000 25000
Opening inventory (w2) 3200
Production (w2) 8000 6080
Closing inventory (w2) -3200 -4800 -1280 -8000
Variables sales commission -750 -1250
Contribution 9450 15750
Less fixed cost
Fixed Production 4000 4000
Fixed administration 2000 2000
Fixed Selling 4000 -10000 4000 -10000
Profit -550 5750
Reconciliation of profit
figures May June
Ksh ‘000’ Ksh ‘000’
Profit under absorption 1450 4550
Difference in units of inventory 2000 -1200
Profit under marginal costing -550 5750

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Table 1
Table 1: Budgeted and actual cost of metal used in producing Product A
Budgeted material cost per
unit of the product 2kg at £10/kg
Actual output 1000 units
Actual material purchased
and used 2200kg
Actual material cost £20,900
Table 1: Budgeted and actual cost of metal used in producing Product A
Standard Details
Cost per unit 2 kg
Price Per Kg 10
20
Price per unit 2000
Standard quantity to
produce
Actual output 1000 units
Actual material purchased
and used 2200 kg
Actual material cost 20900
Actual Price per kg 9.5
Actual Quantity 2.2
Material Price Variance (Standard Price- Actual Price)*Actual qty
1100
Material Usage
Variance
(SQ for actual output-AQ)*Standard
Price
-2000

MANAGEMENT ACCOUNTING 21
Material Cost Variance
Standard cost for actual output- Actual
Cost
-900
Table 2
Table 2:Purchases and issues of raw material
(metal)
1-May Opening Inventory of 40 units @£3 each
12-May Bought 20 units @ £3.60 each
15-May Issued 36 units
20-May Bought 20 units @3.75 each
23-May Issued 10 units
27-May Issued 25 units
30-May Issued 5 units
LIFO Method
Date Purchased Issues Inventory
Units £/Units Total
Unit
s $/Units Total Units $/
Units Total
1-May 40 3 120 40 3 120
12-
May 20 3.6 72 40 3 120
12-
May 20 3.6 72
15-
May 20 3.6 72 24 3 72
15-
May 16 3 48
20-
May 20 3.75 75 24 3 72
20-
May 20 3.75 75
23- 10 3.75 37.5 24 3 72

MANAGEMENT ACCOUNTING 22
May
23-
May 10 3.75 37.5
27-
May 10 3.75 37.5 9 3 27
27-
May 15 3 45
30-
May 5 3 15 4 3 12
Average Costing Method
Date
Number of
items Cost per unit Total Cost
1-May 40 3 120
12-May 20 3.6 72
20-May 20 3.75 75
80 267