Comprehensive Management Accounting Report for ABC Ltd

This report delves into the realm of management accounting, focusing on its significance in the internal operations of organizations. It uses ABC Ltd., a manufacturing firm specializing in fresh juices, as a case study to illustrate different systems and reporting methods. The report covers key aspects of management accounting, including the difference between management and financial accounting, various systems such as inventory management, cost accounting, price optimization, and job costing. It also explores different reporting methods like budget reports, job costing reports, accounts receivable reports, and inventory reports. The report further examines the application of marginal and absorption costing techniques, comparing their benefits and limitations. Additionally, it analyzes the benefits and uses of management accounting systems and explores different management accounting systems that can be adopted to address financial problems, with a focus on budgeting and planning tools. Overall, the report provides a comprehensive overview of management accounting principles and practices, offering insights into its role in resolving financial issues within a business.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1. Explaining the meaning of management accounting and the significance of its systems....1
P2. Describing different methods that could be used by the company for reporting .................2
M1. Evaluating the benefits and the uses of the management systems. ....................................2
LO2..................................................................................................................................................2
P 3 Preparing income statements of the company using marginal and absorption costing
techniques....................................................................................................................................2
LO4..................................................................................................................................................3
P4. Explaining benefits and the limitation of the different planning tools.................................3
M3. Analysing the uses and the application of the budgeting tools ...........................................5
LO4..................................................................................................................................................6
P 5 Describing different management accounting systems to be adopted by companies in
order to respond to different financial problems.........................................................................6
M4 Analysis of different management accounting technique of responding to different
financial problems.......................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Management accounting refers to the effective management of the internal operations of
organizations. It is the practice that is adopted by the firm in order to efficiently organizing its
resources and provides for better controlling. The present study is based on ABC Ltd., a
manufacturing firm, deals in the production of fresh juices. Furthermore, the report highlights on
different system and the reporting under management accounting, Moreover, it also includes the
deep insights towards various planning tools and the systems that helps in resolving the financial
problems within the business.
LO1.
P1. Explaining the meaning of management accounting and the significance of its systems
Management accounting refers to the practice of framing the statistical and the financial
information to the managers with the help of which they could be able to make the routine and
the short-term decisions. Both management and financial accounting differs to a large extent as
follows-
Management Accounting Financial accounting
It provides for the ways in which the problems
could be resolved.
It reports for the profitability that is gained by
the ABC Ltd. from its business.
This branch of accounting doesn't have to
follow any of the standards at the time when
the information is been compiled in relation to
internal consumption.
Under this, the reports are been prepared in
compliance with the accounting standards as
stated by IFRS and GAAP.
It accounts for the reporting to internal
management and not to the outsiders.
However, financial accounting reports to
internal as well as the external users.
Various systems of management accounting are as follows-
Inventory management system- It means the system that accounts for maintaining the
appropriate records of the inventory. It is counted as an extremely important system because it
facilitates constant follow up regarding the incomings and the outgoings. It helps in measuring or
determining the requirement of the products in accordance with the demand of the customers. It
is the medium through which the ABC Ltd. can run its operations smoothly.
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Cost accounting system- This system is been used by the ABC Ltd. in order to record the
production activities by using the system of perpetual inventory. It plays an essential role in
tracking the raw material at the time when they go through stages of the production till it turns
into the finished goods. It enables the firm in examining cost structure within the business by
gathering the information in relation to the cost involved in the activities of the company. It also
assigns the cost towards the products, cost objects and services for the purpose of evaluating
efficiency in usage of the cost. It is majorly concerned with developing detailed understanding
on the key areas from which the company earns maximum profits.
Price optimization system- This system provides for making the analysis of the customer's
response towards the product at the different level of price mathematically. It plays a significant
role in fixing the most suitable price for the ABC Ltd. so that higher demand could be created for
its product in the market which in turn helps in gaining larger profitability.
Job costing system- It refers to the practice of accumulating the information in relation to the
cost attached to particular job or the unit of production. Information provided by this system is
essential in terms of identifying accuracy in the estimating system of an entity.
P2. Describing different methods that could be used by the company for reporting
Managerial reports are been prepared for facilitating the information relating to the cost,
high performing staff, reward, product lines and making investment in such goods that serves
best returns for the business. There are different reports which are been formulated for running
the operations effectively as follows-
Budget report- It means the report that makes the list of the budgeted expenses and the
revenues. It helps the ABC Ltd. in analysing the performance of its business and enables the
managers in assessing the performance of the department and in keeping the control over the
cost. The budget estimates that are made for the upcoming or the new period are on the basis of
the actual expenses from the previous years. This report is also useful for the managers and the
company in order to provide the rewards or incentives for the employees. The budgeted funds are
been used for providing the bonuses to staff in respect of achieving the financial goals.
Job costing report- This report is been prepared for showing the expenses for the
particular proposal which is being financed by the organization’s business. It is been actually
matched up by making an estimation of the revenues so that appropriate evaluation could be
made regarding the profitability of the job. It helps in determining the areas that are higher
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earning so that ABC Ltd.could emphasize on the additional efforts rather than wasting the money
and the time on the jobs with the lower profit margins. This report is also useful in computing the
expenses at the time when the project is progressing so that optimum use of the resources can be
made.
Accounts receivable report- It refers to the report that includes the details regarding the
balances that are to be received to the organization. It is critical for the company in order to
manage its cash flow in case credit is extended to the customers of business. It is the report that
breakdown the balances of the customer for the purpose of finding out the time period for which
they are been owed. In case there is large no. of people who have not paid the balances then an
ABC Ltd.has to take appropriate steps for tightening its credit policies. Thus, it helps in
overlooking on the old debts and in making timely recovery of it.
Inventory report- This report helps in keeping the track over the physical stock that the
company is manufacturing and provides for the ways for making the manufacturing process
much better and efficient. It assists the ABC Ltd. in finding out the areas that need improvement
and in knowing out the best-performing functional departments.
M1. Evaluating the benefits and the uses of the management systems.
Systems Benefits
Inventory management system It helps in keeping the track over the goods
throughout the supply chain which helps in
maintaining the optimum inventory level
within the organization.
Cost accounting system This system is useful for manufacturing firm
that is ABC Ltd. as it helps in ascertaining the
cost that is been incurred in the production of
the article. With the use of this system an
effective controlling process can be attained in
terms of cutting the irrelevant cost.
Job costing system It is the system that enables the ABC Ltd. in
assigning the cost to specific or each job so that
each job or the service could be assessed
adequately.
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Price optimization system It helps in knowing the demand for the product
by mathematically determining the response of
the customers at various price levels. This in
turn allows the ABC Ltd. in setting up the most
suitable prices.
LO2.
P 3 Preparing income statements of the company using marginal and absorption costing
techniques
Marginal costing:
Marginal costing is a technique used by the managerial accountant for preparing i9ncome
statements of the firm. Under this technique, the profit generated by the business is being
calculated after deducting marginal costs of production from the sales revenue earned by it
during a specific time period (Spraakman and et.al., 2018). Under this technique, for the purpose
of computing marginal cost of production, each variable cost incurred by the business is being
treated as product cost on the other hand, all the fixed production costs are treated as the period
costs and hence, do not become a part of marginal cost.
Absorption costing:
Absorption costing is also a widely used technique of management accounting system in
order to net profit generated by the firm from the sale of a specific volume of goods. In this
technique, each and every costs beared by the company in order to produce any goods or services
becomes a part of production cost regardless of whether they are fixed or variable. Hence, the
profit generated by the firm is being calculated after deducting all the production costs from the
amount of sales revenue.
Difference between marginal and absorption costing
Both marginal and absorption costing are the techniques of management accounting used
for the preparation of income statement of the firm in order to determine the amount of profit
generated by the company by selling a specific volume of products. Due to difference in method
of calculating profit and different assumptions, both techniques provide different results to the
managers in terms of profit.
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One of the essential differences between these techniques occurs at the time of
calculating cost of production of the company. In the absorption costing technique, each
manufacturing cost of production becomes part of production cost. On the other hand, only
variable costs of production are taken into account at the time of computing cost of production
under marginal cost system (Chen and Yin, 2019). Further, amount of profit of the company
derived from the marginal costing techniques comes more than the amount derived from
absorption costing. The major reason behind it is the difference in the assumptions taken by both
the techniques. Due to exclusion of fixed manufacturing overheads from the amount of cost of
production, the marginal costing techniques shows more profit to the company.
Under marginal costing
Cost per unit
Direst Material 18
Direst Labour 4
Variable O/H 3
Marginal cost per unit 25
Selling price 50
-Marginal cost per unit -25
-variable selling price -5.00
Contribution per unit 20.00
profit and
loss
statement
by using
marginal
costing
method
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Novembe
r
Decembe
r
particular
s unit price unit amount
net
amount unit price unit amount
net
amount
sales 50 10000 500000 500000 50 12000 600000 600000
less cost
of sales 25 2000 50000
variable
cost of
productio
n 25 12000 300000 25 10000 250000 300000
Lessc
closing
stock 25 2000 50000 250000
less
variable
cost of
productio
n 5 10000 50000 50000 5 12000 60000 60000
200000 240000
less fixed
variable
productio
n cost
productio
n 99000 99000
Selling
price 14000 14000
administr
ative 26000 139000 139000 26000 139000 139000
61000 101000
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unit price unit amount unit price unit amount
sales 50 10000 500000 500000 50 12000 600000 600000
less cost
of sales
opening
stock 34 2000 68000
productio
n cost 34 12000 408000 34 10000 340000 408000
34 2000 68000 340000
gross
profit 160000 192000
adjustmen
t for fixed
and under
absorptio
n 9000 9000
169000 183000
Income statement
using absorption
costing method
particulars Amount Per unit
Normal level of
production 11000
Fixed overhead cost 99000
Fixed production 9
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overhead
Total production cost
variable cost 25
Fixed cost 9
Total 34
LO3.
P4. Explaining benefits and the limitation of the different planning tools
Budgetary control- It refers to the practice for the managers in setting of the financial
and the performance goals regarding the budgets, in comparing actual results and in making the
adjustment within the performance as required.
Advantages Disadvantages
It is useful in monitoring the current trends
within the business and in identifying the
future trends.
It provides for the effective utilisation of the
resources that includes the factors of the
production like material, money, human
resource and the machines.
In the changing conditions, it might not
possible for the company in achieving the
targets that are budgeted (Schlegel, Frank and
Britzelmaier, 2016).
Coordination and the correlation of the several
budget is tend to be expensive.
Capital budget- It means the budget that allocates the money for the purpose of acquiring
and maintaining the fixed assets like equipment, buildings etc.
It enables ABC Ltd in making the anticipation
regarding which of the investment option will
be yielding better profits.
It helps the firm in making the long run
strategic investments.
The decisions that are been made under this
method are for long term purpose which are
irreversible in the nature.
Under this budget, discounting and the risk
factor stays subjective to the perception of
manager.
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Master budget-It refers to the document which integrates the individual budget that is
been formulated by different departments in the company.
It provides for the summary of divisional
budget and encourages the managers in
comparing actual results with that of the
budgeted results (Opgenoord and Willcox,
2016).
It helps the company in achieving the goals
with making an effective plan in advance.
This budget is rigid because as it does not takes
into account the new opportunities in order to
attain growth in the long run.
It is very difficult to modify the master budget
as it is a lengthy process and could not be
understood easily.
Operating budget- It is been referred as the budget that comprises of the expenses and
the revenues over the time period, which is been used for planning the operations of an entity.
This budget provides for the information in
relation to long range needs of an enterprise.
It develops the flexibility in the budget as by
building the flexible amount of spendings in
order to meet the unanticipated cost
(Kengatharan, 2016).
There are various federal tax related
complication included in the operational
budget.
It requires the adjustments on a regular interval
of time which in turn consumes a lot of time
for the managers and they could not focus on
important task.
Financial budget- It means the financial plan prepared for the defined period and
includes details regarding the allocation of the resources the towards different departments for
the purpose of managing cash flows in effective manner.
It assist the managers of ABC Ltd in creating
the financial awareness relating to their
spending and the earnings (Hatcher, 2015).
For preparation of this budget highly skilled
staff is required which in turn increases the
cost of the company in terms of training.
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This budget helps the business in recognizing
the opportunities which will be helpful in
expanding the business.
It is difficult to prepare as it deals with
numerical data and its evaluation.
Flexible budget- It means the budget that accounts for the adjustment of the changes in
the activities of the business. It is also called as the variable budget. It makes use o0f the
revenues and the expenses that are been produced in present production in terms of the baseline
and makes estimations on the ways in which these revenues and expenses will be changing on
the basis of the modifications in output. An ABC Ltd (Hopper and Bui, 2016). makes use of this
budget in order to predict the best or the worse scenarios for upcoming periods.
Advantages Disadvantages
Flexible budget allows for adjustment of the
changes in terms of the costa and the profit
margins within the activities of the business so
that such changes can be easily handled.
It facilitates the control over the cost in the
better way as it helps in reacting quickly
towards the adverse conditions.
As under this budget the sales revenue and the
expenses are consistently adjusted based on the
present operating conditions, so the ABC Ltd.
can get the updated data with current trends.
It provides for forecasting of the receipts and
the expenses for the coming period (Latan and
et.al., 2018). It also facilitates comparison in
between previous and the present results so
that reasons for decrease in the particular items
could be assessed.
It referred as the time extensive technique
because adjusting the changes on a regular
basis almost accounts for the preparation of the
new budget (Curry, 2019). Due to this a lot of
time of the managers gets wasted in making
budget and he couldn't focus on the important
task within the business.
Managers of the ABC Ltd. faces difficulty in
forecasting the flexible expenses. For example-
changes in the legislation relating to increase in
the labour cost cannot be forecasted.
Formulating a flexible budget is stated as the
complex task because it includes timely
recording of the changes.
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