Management Accounting Report: Costing, Budgeting, and Planning

This report provides a comprehensive overview of management accounting, exploring its significance and various systems. It begins by defining management accounting and highlighting its importance in business decision-making and financial reporting. The report then delves into different types of management accounting systems, including cost accounting, inventory management, price optimizing, and job costing systems, detailing their functionalities and applications. It further examines various methods used in management accounting reporting, such as budget reports, performance reports, and account receivable aging reports. The report also emphasizes the benefits of management accounting systems, like cost reduction, inventory control, and optimal pricing, and their impact on achieving organizational goals. Furthermore, the report includes practical examples using marginal and absorption costing to analyze financial performance and evaluate profitability. It concludes by discussing the adoption of management accounting systems in resolving financial problems and the use of planning tools in budgetary control, providing a holistic view of the subject.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION............................................................................................................................3
TASK 1............................................................................................................................................3
Management Accounting & need of different management accounting system.........................3
Methods used for management accounting reporting.................................................................4
Importance of management accounting systems and their use...................................................5
Critical Evaluation of Management accounting system & reports..............................................5
TASK 2............................................................................................................................................6
TASK 3............................................................................................................................................7
Pros & Cons of planning tools used in budgetary control...........................................................7
Use of planning tool in preparation & forecasting of budget......................................................9
TASK 4............................................................................................................................................9
Adoption of management accounting system for resolving financial problems.........................9
Use of Planning tools in resolving financial problems..............................................................11
CONCLUSION..............................................................................................................................12
REFERENCES...............................................................................................................................14

INTRODUCTION
Management Accounting is a process used by companies to for managing & maintaining
various types of cost incurred in business. This report explains meaning of management
accounting. Further, this report includes types of management accounting systems and
advantage & disadvantage of accounting systems. Furthermore, this report elaborate benefits of
management accounting system (Shields and Shelleman, 2016). Moreover, this report includes
techniques of management accounting and explains those techniques with the help of practical.
Further, this report highlights advantage & disadvantage of different planning tools used in
budgetary control. At last, this report elaborate use of management accounting system in
resolving financial problems.
TASK 1
Management Accounting & need of different management accounting system
Management Accounting
Its is an accounting process in which various cost incurred during business operations are
evaluated with the purpose of taking business decisions and preparing financial reports of
organisations (Holopainen, Niskanen and Rissanen, 2019). Management accountant of ABC Ltd.
also uses management accounting for making strategic decisions and for resolving problems
occurring in manufacturing process. Use of this accounting process by company enable it in
achieving its goals & objectives. It also minimises & manages cost of manufacturing which in
turn enhances profits of ABC Ltd(Laux and Stocken, 2018).
Management Accounting System
This system is used by organisations for evaluating & analysing assorted types of cost
which is essential in manufacturing of products & services of business (Spraakman and et.al.,
2015). There are many types of management accounting systems available and used by
companies. They all are required for different purpose, which are discussed below-
Cost Accounting System- It is a type of managerial accounting system which are used
by accountant of ABC Ltd. to find out cost of its products & services. Thus, it is also known as
Product costing system (Dai and Vasarhelyi, 2017). This system is required to use by company
as it helps in assessing profits included in a particular product because firm can set its profit
margin only after estimating cost of goods & services. Cost accounting system is also essential in

valuation of inventory and it also helps business in purchasing stock at a price which minimises
cost or in accordance with estimated cost. Further, this system is also used by ABC Ltd. for
managing cost of its products.
There are two types of cost accounting system, Job Order Costing & Process Costing. Job
Order Costing is required for estimating cost incurred in manufacturing of each job while Process
Costing is important in estimating cost of each process (Ahmad and Mohamed Zabri, 2015).
Inventory Management System- ABC Ltd. use a software to manage all of its sales,
inventory level such as closing & opening stock and orders received for its products. Thus, it is a
a system software and it is also required to generate bills, for preparation of other order
documents (Szychta and Dobroszek, 2016). By using this system software companies
productivity is increased as it has it is having sufficient inventory which can be used any time.
Use of this system is also required as it reduces unnecessary wastage of raw material and with
this firm can track as how much inventory is placed at what place. Thus, this system is also
essential to used by companies as it enhances their performance & sales volume which in turn
maximises profits of ABC Ltd.
Price Optimising System- Price Optimising is a system in which company does a
statistical analysis to set a price for its final products & services. Company analyse response of
consumers on different prices and on that basis decide final price of its products & services. This
management accounting system is required to use by ABC Ltd as it helps in maintaining
profitability level of company and it is also beneficial in retailing customers. Use of this system
is also required in achieving goals of company by offering goods & services at an affordable
price(Hoyle, Schaefer Doupnik, 2015).
Job Costing System- This system is used for evaluating cost of manufacturing of each of
its product (Shields and Shelleman, 2016). Thus, this system is required to use by ABC Ltd as it
helps company in achieving more profits by minimising cost of manufacturing of each of its
product. Different methods of Job Costing are discussed below-
 Costing Method- A method through which managers of business organisations calculates
cost of each of business activities separately is termed as Costing Method.(Kastberg and
Siverbo, 2016)

 Contract Costing Method- Under this method cost incurred in a specific contract with
customer is monitored and controlled. For Example- A contract is made between a
customer and a civil engineer for construction of a building than overall cost associated in
this contract is determined on the basis of this method(Holopainen, Niskanen and
Rissanen, 2019).
 Batch Costing Method- A method which calculating cost of each job is known as batch
costing method. Batch contains number of units but it is not necessary that each batch
will contain same number of units(Kastberg and Siverbo, 2016).
 Process Costing Method- A costing method used to determine cost of each production
unit. This method is very useful for business organisation as it helps in ascertaining cost
of each product and with this production managers of firm is enable to minimise cost of
production(Shields and Shelleman, 2016).
Methods used for management accounting reporting
Management accounting is also used in preparation of reports which helps in strategic
planning, making important decisions related to manufacturing and for evaluating performance
of companies (Guenther and et.al., 2015). Various methods are used for management accounting
reports which are discussed below-
Budget Reports- In this method a report on estimated budget of future expenses &
income of company is prepared. By using this method accountant of ABC Ltd can evaluate &
measure performance of its business operations and this report also helps firm in eliminating
unnecessary cost. This report is prepared on the basis of past years budget thus, it is time
consuming and does not require extra cost (Barry and Dent, 2017).
Performance Reports- ABC Ltd prepare performance report to assess overall
performance of its business with this company can check whether its business is profitable or not
(Azudin and Mansor, 2018). On the basis of this performance report managers & accountants of
firm make decisions so that they can achieve higher profits in future and with this report
company also able to achieve its objectives easily.
Account Receivable Ageing Report- This report is prepared by organisation which
sales their goods & services on credit. Company prepare this report in finding out as in how
much time customers give money due on bills (Kastberg and Siverbo, 2016). ABC Ltd has to use

this method as it helps in collecting credit from customer and on the basis of this report firm can
makes decisions related to its credit policy.
Importance of management accounting systems and their use
Benefits of Managerial Accounting Systems & their Application
Management accounting system helps company in maintaining its profitability, making
decisions and also beneficial in meeting its objectives. Different accounting systems has their
own benefits in companies operations-
 Cost Accounting System is beneficial for ABC Ltd in managing & minimising cost of its
products & services which in turn maximises profits & market share of firm (Holopainen,
Niskanen and Rissanen, 2019). It is also helpful in making important decisions regarding
reduction in cost of a particular product.
 Inventory Management system is beneficial for ABC Ltd in tracking level of inventory
and it also reduces problem of scarcity of stock (Spraakman and et.al., 2015). This further
important for company in maximising its product output which further enhances sales
volume of firm(Gooneratne, and Hoque, 2016).
 Price Costing System is beneficial for ABC Ltd in offering its goods & services at a price
which is favourable for customers (Dai and Vasarhelyi, 2017). If company is able to offer
goods at price which is satisfactory to customers than profits and customer base of
company get increased.
 Implementation of various management system benefits company in making all important
decisions in regards to price, cost and inventory which in turn leads to organisation goals
and helps in providing quality product at an affordable price (Ahmad and Mohamed
Zabri, 2015).
Critical Evaluation of Management accounting system & reports
As per (Ofosu, 2018), management accounting system & management accounting report
are integrated as for preparation of budget report an estimation of cost of manufacturing of goods
& services are required and this is become possible by implementing cost accounting system in
organisation (Szychta and Dobroszek, 2016). Price Optimisation and inventory management
system helps in making of performance report because if ABC Ltd has sufficient inventory and it

is able to offer its product and services at an affordable price than performance of firm is can be
evaluated which helps in preparation of performance report.
On the other hand, According to (Chenhall and Moers, 2015) managerial reports are
prepared for achieving & evaluating over all performance of company and management systems
are used for analysing manufacturing of products & services. Records are beneficial for company
in making budget and analysing cash flows while management accounting is not helpful in
analysing overall profitability & performance of firm.
TASK 2
a) Marginal Costing
Budgeted Income Statement
Particulars Amount
Sales (16000 units @ £50 per unit) £800000
Less- Variable Cost @ £35 per unit (£560000)
Contribution £240000
Less- Fixed Cost (£100000)
Profit £140000
From the above income statement it is evaluated that company can achieve profit of
£140000 if it is able to sales 16000 units at a price of £50 per unit.
Actual Income Statement
Particulars Amount
Sales (16000 units @ £50 per unit) £800000
Less- Variable Cost @ £35 per unit (£560000)
Less- Closing Stock (3000 units @ £50 per unit) (£150000)
Contribution £90000

Less- Fixed Cost (£100000)
Loss £10000
By evaluating above statement of profit and loss it is interpreted that business firm is
suffering from loss at budgeted sales of 16000 units as company is having a closing balance of
3000 units so all 16000 units are not sold from produced units.
b) Absorption Costing
Production Cost Per Unit
Particulars Price Per Unit
Direct Material £10
Direct Labour £20
Variable Production Overheads £5
Fixed Production Overheads £5
Total Cost of Production Per Unit £40 per unit
In the above table direct cost incurred in manufacturing process are calculated. Which
shows that company is incurring direct cost of production £40 per unit. Further, it is evaluated
that total cost of production and cost of sales are same as there is no selling & administration
expenses.
Budgeted Income Statement
Particulars Amount
Sales 16000 units @ £50 per unit £800000
Less- Cost of Goods Sold @ £40 per unit £640000

Gross Profit £160000
Less- Selling & Administrative Expenses -
Operating Income £160000
From the above calculation it is evaluated that business firm is estimating a profit of
£160000 it it sales 16000 units at a price of £50 per unit and after deducting direct & indirect
cost(Shields and Shelleman, 2016).
Actual Income Statement
Particulars Amount
Sales 16000 units @ £50 per unit £800000
Less- Cost of Goods Sold @ £40 per unit (£640000)
Less- Closing Stock (3000 units @ £50 per
unit)
(£150000)
Gross Profit £10000
Less- Selling & Administrative Expenses -
Operating Income £10000
The above statement of profit & loss shows that there is a profit of £10000. Further, it is
interpreted that selling and administration cost of company is nil.
TASK 3
Planning tools are prepared by organisations for analysing performance of business and
with an objective of achieving business objective. ABC Ltd use many management planning
tools for smooth functioning of its business(Maas, Schaltegger and Crutzen, 2016).

Pros & Cons of planning tools used in budgetary control
Budgetary control is a method through which financial performance of business can be
maintained by setting up goals and achieving them by preparing future financial plan (Shields
and Shelleman, 2016). Tools that are used by organisations in budgetary control are discussed
below-
Zero Based Budgeting- Zero Based Budgeting is a method of preparation of budget
according to which financial plan of company is prepared in every year. Firm does not make plan
by using past data (Guenther and et.al., 2015). In this method cost, expenses and income are
estimated in each year and in accordance with needs & cost of firm. Advantage & Disadvantage
of this method are discussed below-
Advantage Disadvantage
 Budget is prepared in accordance with
economic situations and demand &
supply of products of ABC Ltd in this
method which is its biggest advantage.
 Budget prepared by using this method
is cost effective as each cost is
evaluated and this in turn helps
company in maximising its profits &
revenues.
 Disadvantage of this method is it
consumes much time as all data are
analysed from zero base.
 This method also require huge cost as
each cost & expenses are evaluated
which needs experts (Azudin and
Mansor, 2018).
Activity Based Budgeting- Activity Based Budgeting is also a planning tool used by
companies for preparation of budget (Kastberg and Siverbo, 2016). In this method budget is
prepared for each activity performed in ABC Ltd. According to this method income & expenses
are estimates for each production activity. Thus, this method improves efficiency of each of
business process which in turn leads to over all growth of ABC Ltd. Pros & Cons of this method
are discussed below-
Advantage Disadvantage
 By using this ABC Ltd can control its  Different budget is made for different

over all budget which helps company in
achieving higher profits(Renz, 2016).
 Budget is made for each department
which in turn eliminate unnecessary
cost.
department which requires much time
and cost.
 For preparing budget by Activity Based
Budgeting prior assumptions related to
demand of product is required and
which leads to inaccuracy of budget.
Incremental Budgeting- A budget of financial plan prepared on the basis of past years
budget is known as Incremental Budget (Holopainen, Niskanen and Rissanen, 2019). This tool is
most widely used by small business big firms does not prefer to use this planning tools for
controlling their future budget. This method has its own advantage and drawbacks, which are
discussed below-
Advantage Disadvantage
 Budget prepared in this method is rigid
which benefits ABC Ltd in performing
its operations.
 This tool does not require much time &
efforts as all data are collected for
previous years budget (Spraakman and
et.al., 2015).
 This method of budgetary control is
very simple.
 This method is not much effective as
budget does not reflect current
economic situation of country which in
turn reduces profits of ABC Ltd.
 No innovative techniques are used in
operations which declines performance
& productivity of firm,
Use of planning tool in preparation & forecasting of budget
Planning tools which are used in preparation & forecasting are discussed below-
Sales Budget- Its is a planning tool used for forecasting sales of company for upcoming
financial year. It also helps in manufacturing of goods because if amount of future sales is
estimated than on that basis production budget is prepared (Dai and Vasarhelyi, 2017). Sales
budget is prepared on the basis of sales per unit and price of products per unit. Estimation of

future sales of ABC Ltd further helps company in preparing its over all financial budget thus, this
planning tool is useful for budget forecasting.
This tool is applicable in forecasting budget because with accountant of ABC Ltd can
allocate funds to different department such as manufacturing department, marketing department
and various other department. It also helpful in determining future profits of business (Ahmad
and Mohamed Zabri, 2015).
Operating Budget- This planning tool is used in preparation of budget for over all
operations of business on the basis of future sales forecasting. This budget includes all cost,
expenses and incomes of ABC Ltd. Thus, this planning tool can be applied for future budget
forecasting as it includes detailed information of companies income & expenses (Szychta and
Dobroszek, 2016). By using this planning tool a firm can decide its future goals & objectives and
with this future profits of company can be estimated.
Cash Budget- It is a financial plan which includes a detailed plan of future cash inflows
and outflows of firm. ABC Ltd. can apply this tool in forecasting of its future budget as it shows
availability of cash with the firm with this company can allocate resources and estimate its future
expenses and profits (Shields and Shelleman, 2016). As this planning tool helps in preparation of
final budget of firm thus, it is applicable to future forecasting of companies overall income &
expenses(Kaplan and Atkinson, 2015).
Static Budget- A future financial plan which contains details of future income and
expenses. This budget is rigid and a manager is not required to make changes in this budget
according to changing business situation. This budgeting tool is not useful in changing market
situations(Holopainen, Niskanen and Rissanen, 2019).
Flexible Budget- Allocation of funds in this budget can be change due to change in sales
volume and demand of customers. Thus, this budget is known as flexible budget and it is more
useful planning tool for Tesco as it facilitate effective utilisation of resources(Dai and
Vasarhelyi, 2017).
Rolling Budget- A budget which gets updated on a daily basis by adding new budget
period is known as Rolling Budget. This is the most efficient tool as it monitor & control cost on