Management Accounting Report: Analysis of Sollatek Company

This report examines management accounting principles through a case study of Sollatek, a company involved in manufacturing products for electrical and electronic equipment. The report explores various aspects of management accounting, including its definition, different types of systems like throughput and lean accounting, and traditional methods. It details the advantages of management accounting systems, such as cost reduction and improved decision-making. The report covers the preparation of performance reports, job costing reports, variable analysis reports, and budgets. It also analyzes the integration of management accounting systems and reports, along with the preparation of income statements using marginal and absorption costing. The report further discusses planning tools for budgetary control, the adoption of management accounting systems to address financial problems, and the role of management accounting in achieving sustainable success. Overall, the report provides a comprehensive overview of management accounting techniques and their application within a business context.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Management accounting and essential requirement of different types of management
accounting systems......................................................................................................................3
M1 Advantages of management accounting systems and their application................................4
P2 Methods that are used for management accounting reporting...............................................5
D1 Evaluation of how management accounting systems and reports are integrated..................6
TASK 2............................................................................................................................................7
P3 Preparation of income statement using marginal and absorption costing..............................7
M2 Application of various management accounting techniques..............................................10
D2 Accurate interpretation of the data by production of the reports........................................11
TASK 3..........................................................................................................................................11
P4 Planning tools that can be used for Budgetary Control. .....................................................11
M3 Different types of planning tools and their application in the preparation of budgets.......13
P5 Adoption of management accounting systems to respond to financial problems................13
M4 Role of management accounting in sustainable success....................................................14
D3 Solving of financial problems by using planning tools.......................................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is the process by which organisation goals and objectives that
are decided can be achieved (Ajibolade, Arowomole and Ojikutu, 2010). For this purpose it will
include various processes to be undertaken which will include identification, measurement,
analysation of the relevant information, and than on that basis interpretation will be carried out
and all the findings will be required to be communicated so that the goals can be achieved. The
main purpose of management accounting is to provide the required information to the managers
which will be helpful for them in their decision making process. This form of accounting focuses
on helping the internal managers of the company and in this no information is provided to the
outside parties. In this assignment various aspects in relation to management accounting such as
meaning of management accounting, types of management accounting systems, different
budgetary control techniques and costing methods will be discussed with reference Sollatek. This
company was founded in 1983 and is involved in manufacturing of products which are helpful in
protecting electrical and electronic equipments.
TASK 1
P1 Management accounting and essential requirement of different types of management
accounting systems.
In a business there are various decisions that are required to be taken for the attainment of
the objectives and goals that are set by the company (Albelda, 2011). In order to achieve this
sollatek will be required to prepare various reports that will help the management in acquiring all
the financial and statistical information on the timely basis and in accurate manner which will
help them in performing various decisions. This process of preparation of reports is known as
management accounting. These reports are made just for internal use and will not be provided to
anyone for external use. They will show various amounts in relation to cash available,
outstanding debts, sales revenue, variance analysis and many other figures. The main areas in
which management accounting can be used are risk management, performance management and
strategic management. There are different types of management accounting systems that can be
used by Sollatek which are described below :
1. Throughput Accounting : - In the production process of sollatek there are various
constraints that will be present and will be required to be identified. In the process of

throughput accounting focus will be given on identification of such constraints only. The
constraints can be various such as insufficiency of labour , material or any other facility.
These constraints are reduced in this system and this is achieved by increasing the
volume of production by which the per unit cost of the product will get reduced.
2. Lean accounting : - In case of lean accounting instead of giving importance to cost the
main focus is kept on formulation of different strategies that will be helpful in reduction
of cost (Arroyo, 2012). The objective of cost reduction will be achieved by reducing the
level of wastage that takes place in the production process carried on by sollatek. There
are various such irrelevant cost that can be eliminated from the production process and
for that purpose information will be required that will be available with the help of this
system. The information will be provided by the accountants on the immediate effect.
3. Traditional management accounting Systems : - the main focus of this system is on
tracking of the cost and that can be achieved by the use of various methods that will
include methods such as job order costing or process costing. With the help of these
methods the manner in which various cost are required to be allocated will be
determined. Job costing will be used in the case where individual allocation is possible
whereas process costing will be required where there are many processes involved in
production of the product.
4. Transfer Pricing : - in the system of transfer pricing cost of the product will be
calculated on the basis of the movement of the goods that takes place during the
production from the different departments included in production system (Bodie, 2013).
Variable cost and opportunity cost are the two main cost that are involved in the system
of transfer pricing. There will be addition at each stage and so the cost will also increase
in small portions.
A part from these there are various other management accounting systems which are available
and can be used. They include cost accounting systems, job order costing, inventory management
system and price optimisation systems.
Cost accounting method – It is the process of accounting in which recording of various
operations are done according to their actual cost incurred. It is a continuous process in which
recording, classification, analysing and summarising of various entries are made which is utilised
to manage the various activities of the given entity.

Job costing – It is a different method in which recording of different entries are done according
to the cost of different jobs as distinct job incurs different cost and therefore through this cost of
each job can be identified.
Inventory management system – It is a method through which the total stock is maintained so
that both the situations of excess and deficit can be avoided as this has major impact on the total
productivity.
Prize optimization – Through this method of accounting management reach to the best price
which it can offer in the market as maximum care has to be given before fixing the price of the
commodity so that customers can accept the same.
M1 Advantages of management accounting systems and their application.
There are various benefits that company receives form management accounting systems.
Some of them are :
Reduction in expenses : With the help of management accounting systems Sollatek will be able
to know about those activities that are relevant and by this the expenditure that is incurred in
relation to irrelevant activities can be eliminated.
Making Decisions : The information that will be available with the use of various management
accounting systems will be helpful for managers to make correct decisions and by this if any
loopholes are present than they will be identified and removed.
P2 Methods that are used for management accounting reporting.
A part from normal financial statements there are prepared by every organisation there
are various other reports that are also required to be made and that includes the following reports
which are described below :
 Performance reports : It is important for Sollatek to measure its performance and this
can be achieved only with the help of performance reports (Chenhall, 2012). For the
preparation of report it will be required that the actual and budgeted figures that are
available in the budget should be compared and on that basis variances will be required to
be identified. These variances will be considered by the management in the preparation of
new budgets. The performance can be evaluated with the help of performance report and
any limitation that are found in the report will have to be removed in order to improve the
overall performance of the company.

 Job Costing Reports : there are various costs that are involved in production of a
product such as production cost, labour cost, overhead cost and many other costs. For the
purpose of determination of the cost of the final product it will be required that all these
costs should be taken into consideration (France, 2010). By following this process the
total cost that have been incurred in the whole production process will be determined and
than with the help of it the cost of each product will be ascertained and that that will be
possible by dividing this total cost with the number of total products that have been
manufactured in the company. Than this report will be prepared with the help of the
information that has been collected and it will be beneficial for sollatek as with the help
of it managers will be able to compare the cost and selling price and on that basis they
will be able to control the profits of the company.
 Variable Analysis Reports : In the production of a product there are various costs that
are incurred and one such cost is variable cost. It is that cost which is never fixed and it
depends on the number of units produced which mean it changes with change in single
unit in production. The profits of the company will be affected to a great extent due to
this cost and due to this reason it is necessary that this report should be prepared.
Management will study the report and with the help of it they will be able to improve the
profit levels of Sollatek.
 Budgets : Budgets are most important in the management accounting as with the help of
it variances can be determined by comparing the actual figures with that of the budgeted
figures (Hiebl, 2014). For the preparation of the budget it will be required by the
company to take into consideration the past details or the previous budgets. Together with
the past budgets they are also required to use the variances that have been calculated and
the projections that have been made in relation to the future should also be considered.
All the targets are mentioned in the budget which are required to be achieved by the
company and so in order to achieve the targets it will be needed that all the amounts
mentioned in the budget should taken care of while performing the activities in the
company.
 Inventory control Reports : In the production process inventory plays the most
important role so it will be needed that all the aspects in relation to it should be taken care
of and mentioned in this report. If there is any wastage that has been noticed than it

should be taken into consideration and reason of it should be identified and measures
should be taken to remove them. Sollatek will determine the inventory level which is
required to be maintained in order to avoid the problem of shortage or excess stock due to
which no irrelevant cost will be incurred and the profits of the company will be
maximised.
D1 Evaluation of how management accounting systems and reports are integrated.
Management accounting systems and management accounting reports are integrated as
with the help of various systems Sollatek will be able to collect the information which will be
further analysed and than that information will be required to be included in the reports (Hülle,
Kaspar and Möller, 2011). Both these will be beneficial for the company as with the help of them
it will be possible to find out the shortcomings and than on their identification management will
be able to make correct decision and also measures can be taken to overcome those
shortcomings. By performing all this the overall performance of the company will be increased.
TASK 2
P3 Preparation of income statement using marginal and absorption costing.
Absorption Costing : By using absorption costing it will be possible to ascertain the cost
of the product. In this costing method the cost of the product will be calculated taking into
consideration all the costs that have been incurred in relation to that product. It is immaterial in
this form of costing that whether the cost that has been incurred is fixed cost or a variable cost as
both will be included in the cost (Kaplan and Atkinson, 2015). The total cost that will be
ascertained by this method will be divided among all the units that have been manufactured. The
major advantage of using absorption costing is that in this while valuing inventory an element of
fixed overhead is also included in it and also the cost is controlled by analysing the over or under
absorption of overheads.
Marginal costing : in the case of marginal costing the cost of the product will change
with the change in single unit of production. This will be due to the reason that in this variable
cost are taken into consideration (Zang, 2011). while calculation of the marginal cost of any
product the cost that are directly related to the product such as direct material, direct labour or
the variable cost associated with that product will be taken into consideration. In this method
firstly contribution will be determined by deducting variable cost from the selling price and than

after this the fixed cost will be considered and deducted from the contribution in order to arrive
at the final profit that is earned by the company.
There are various differences that can be noticed between marginal and absorption costing and
some of them are specified in the below presented comparison table :
Basis Absorption costing Marginal costing
Meaning In this method the cost of
product is determined by
dividing the total amount of
cost to the various cost centres
(Kinney, Raiborn and
Poznanski, 2011).
It is a decision making
technique which will be used
by Sollatek as by this the total
cost that have been incurred in
the production of a product
will be determined.
Classification of overheads In this overheads are classified
as administration, production
and selling and distribution
overheads.
In this overheads are classified
in two categories that are fixed
and variable overheads.
Recognition of cost In this method fixed cost and
variable cost both will be
treated as product cost.
In this variable cost will be
treated as product cost and
fixed cost will be treated as
period cost.
Measurement of profitability In this as the fixed cost is
considered so the profitability
will be affected.
In order to measure the
profitability, profit volume
ratio is used.
Unit cost The factor that affect the cost
per unit in this case is the
variance in the opening and the
closing stock.
In this the variance between
the opening and closing stock
has no impact on the cost of
the product.
Selling price £35
Unit Costs
Direct materials £6

Direct Labour £5
Variable Production overhead £2
Variable sales overhead £1
Budgeted production for the period is 600 units
Fixed costs for the month are given below
Budgeted Cost Actual Cost
Production overhead £1,800 £2,000
Administration cost £800 £700
Selling Cost £400 £600
Calculation of net profit under Absorption costing system
Working Note 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £3
Fixed cost £5
Total £19
Working Note 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*19 = £1900
Working Note 3: under/ over absorbed fixed production overhead
Actual fixed production: £3300
Fixed overhead: £3500
Total £200(over absorbed)
Income Statement
Particulars Amount Amount
Sales (600*35) 21000

Less: Cost of Sales:
Opening inventory
Production
Closing inventory
(Under)/ Over absorbed fixed prod. O/h
Gross Profit
Less Expenses
Variable sales
Fixed administration
Fixed selling
Nil
13300
(1900)
1800
700
600
(11400)
200
9800
(3100)
Net Profit 6700
Calculation of net profit under marginal costing system
Working Note 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production O/H 3
Variable production cost 14
Working Note 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Income statements under marginal costing system
Particulars Amount Amount
Sales (600*35)
Less:Variable costs
Opening inventory Nil
21000

Production
Closing inventory
Variable sales
Contribution
Less:Fixed costs
Fixed Production overhead
Administration cost
Selling cost
9800
(1400)
2000
700
600
(8400)
(1800)
10800
(3300)
Net Profit 7500
M2 Application of various management accounting techniques.
Making of the correct and appropriate decisions is of great importance for any company
so in order to achieve this it will be required by the management that various techniques that are
available should be used as with the help of this it will be possible that the accounts of the
company will be managed. The techniques that will be used in this process are known as
management accounting techniques. It is necessary that a plan is formulated which will specify
that what is to be done by the company and what all are the objectives that are required to be
achieved in order to make the business a success and for this purpose budget can be prepared
which is also a management accounting technique.
D2 Accurate interpretation of the data by production of the reports.
In the above mentioned problem it can be ascertained that the major difference that exists
between absorption costing and marginal costing is due to the different methods of allocation of
the fixed overheads. In case of marginal costing the fixed overheads are not allocated whereas in
case of absorption costing fixed overheads are considered while calculating the amount of profit.
The profits that are obtained by application of both the methods are different and this can also be
verified with the above mentioned problem as in that also the profits are different by both
methods which are 6700 in case of absorption costing and 7500 in case of marginal costing. It
can be seen that profit in absorption is less than that of marginal because in absorption fixed
overheads are allocated.

TASK 3
P4 Planning tools that can be used for Budgetary Control.
The budget is considered as one of the major tools for the company as every company
plans for various operations according to the budget requirements and for this each and every
element of budget is taken into considerations and by the help of budget various operational,
managerial and technical aspects can be analysed for the effective development of products and
services (Macintosh and Quattrone, 2010). Budgets are the long term objectives that can be
evaluated at all the levels of operations that will help the organization to grow and develop on
the levels of successful growth and development.
Various objectives of Budget are : -
 Budget is prepared for long term purpose and it caters to all the requirements that are
being implemented at the level of development.
 Budget is prepared to check actual and necessary performance which are being analysed
so that if there is any disequilibrium between any of them then it can be over-crafted.
Advantages of Budgetary control are : -
 It provides all the strategic policies with future considerations.
 Employees development process takes place.
 It helps in attaining the targets of the organization at the best suitable level.
Disadvantages of Budgetary control are : -
 Provides economic pressure to all the employees of the organization.
 It tends to create a managerial conflict among the employees of the organization.
 Managers are made to form all the budgeted operations that include lot or high cost and
in making these types of operations an organization can suffer loss.
Different types of budgets are : -
Master Budget is the set of budgeted tools which helps any company to plan out operational
work in accordance with connected elements like sales, production cost, purchase incomes, etc.
and it includes all the practical aspects of making a budget that enables them to analyse all the
managerial and economical development (Quinn, 2011). The main advantage of master budget is
that while all the elements are included but they are coordinated in a proper way that enables the
development of managers in practical aspect. Disadvantage is that it always takes all the cost
related operations required for managerial development, not for individual development.