Management Accounting Report: Holder Construction Analysis and Systems

This report provides a comprehensive analysis of management accounting principles and their practical application within a business context, specifically using Holder Construction as a case study. The report begins by highlighting the significance of management accounting in various decision-making processes, emphasizing its role in forecasting, performance evaluation, and make-or-buy decisions. It then assesses different management accounting systems, including job costing, cost accounting, inventory management, and price optimization, evaluating their respective advantages and disadvantages. The core of the report involves a detailed comparison of absorption and marginal costing systems, including the preparation of income statements and a reconciliation analysis to explain the differences in profit figures. Furthermore, the report explores various planning tools used in management accounting and presents how these systems aid in addressing financial challenges. The conclusion summarizes the key findings, reinforcing the value of management accounting for effective financial planning, cost control, and strategic decision-making. The report utilizes financial statements and calculations to illustrate the practical application of the concepts discussed.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................1
SECTION 1................................................................................................................................1
1. Explaining the importance of management accounting in the decision making aspects...1
2. Assessing different types of management accounting systems that can be used within the
firm.........................................................................................................................................2
3. Critically evaluate management accounting systems that are assessed above..................3
4..............................................................................................................................................5
a. Preparing statements by using absorption and marginal costing system...........................5
b. Stating reasons due to which profit as per each technique is different..............................9
c. Reconciliation statement....................................................................................................9
SECTION 2..............................................................................................................................10
Comparing and contrasting planning tools that can be undertaken in accordance with
management accounting.......................................................................................................10
Presenting the manner in which management accounting systems help in responding
monetary problems...............................................................................................................14
CONCLUSION........................................................................................................................16
REFERENCES.........................................................................................................................17

INTRODUCTION
Management accounting field of finance deals with the aspects of performance
evaluation and management. For the purpose of making effective day to day and short term
business decisions manager requires timely and accurate statistical or financial information.
In this regard, MA tools and techniques help in preparing reports that furnishes information
regarding the monetary aspects of the firm. Managerial accounting reports give input for
decision making and thereby make contribution in the attainment of organizational goals and
objectives. The present report is based on Holder Construction, a manufacturing medium
sized business unit, which will provide deepe insight about the different types of MA
systems. Further, report depicts the manner in which MA aid in suitable decision making.
Besides this, it also shed light on the tools that ensure suitable financial planning. It also
presents how MA tools help in preventing and dealing with monetary issues.
SECTION 1
1. Explaining the importance of management accounting in the decision making aspects
Management accounting is the process of preparing accounts and reports that provides
manager with suitable inputs for decision making. In the business organization, managers are
usually faced with countless problems. In this regard, role and significance of management
accounting in decision making aspects are as follows:
Provides assistance in making forecast about future:
MA tools such as activity & zero base budgeting helps in preparing suitable financial
plan and thereby helps in making prediction about the future (Ionescu, 2016). Hence, using
such techniques manager of Holder Construction can assess the revenue or profit margin will
be generated over the expenses.
Facilitates performance evaluation

Variance analysis technique of MA enables manager to do comparison of actual
performance with the standards. Hence, by assessing deviations and associated causes
manager of Holder Construction can take appropriate decision for further improvement.
Assists in taking decision (make or buy):
In the context of manufacturing firms, managers face issue in deciding whether they
need to make or buy component of products from outside. Hence, such issue can be resolved
by the manager more effectually through conducting make or buy analysis (Fullerton,
Kennedy and Widener, 2013). Thus, comparing profit associated with both the options
manager of Holder Construction can select the profitable one.
Helps in taking decision about sales and profit
MA helps manager in assessing the number of units which they need to sell for
recovering the expenses incurred. Further, marginal costing assessment also assists manager
in determining the level of sales that need to be made for the generation of desired profit
margin.
2. Assessing different types of management accounting systems that can be used within the
firm
Management accounting refers to the process of analyzing cost and operations which
in turn helps in preparing financial reports. Hence, report that is prepared as per MA
significantly aid in managers decision making and thereby helps in achieving goals. There are
several types of management accounting systems that can be used by Holder Construction
for managing internal operations, cost control and profit maximization.
 Job costing: This system helps in accumulating information about the costs associated
with specific production or services. By undertaking job costing systems, manager of
Holder Construction can assess or trace cost related to specific jobs. Job costing
system also helps in assessing whether cost or expenses can be reduced in further
production or not (Job Costing, 2018).
 Cost accounting: For manufacturing products or services, business unit incurs several
expenses such as direct and indirect. Hence, using the system of cost accounting
Holder Construction can accumulate all the expenses such as material, labour and
overhead. Hence, by dividing total expenses from the number of units manufactured
unit cost can be identified. Along with this, cost accounting system also helps in

setting suitable price of the offerings. By adding desired margin % in unit cost, firm
can determine or set price of the offerings.
 Inventory management: In the context of Holder Construction, stock management is
highly significant because it imposes cost in front of the firm such as holding,
ordering etc. Hence, using tools such as economic order quantity, just in time (JIT) etc
concerned manufacturing firm can manage stock more effectually and thereby exerts
control cost level (Macintosh and Quattrone, 2010). Thus, MA tools ensure
effective inventory management as well as smooth functioning of the business
operations and functions.
 Price optimization: Such MA system helps in assessing and evaluating the
willingness of customers pertaining to pricing aspects. Hence, by getting information
about the money that customers are ready to pay Holder Construction can set suitable
prices of the products or services.
3. Critically evaluate management accounting systems that are assessed above
Benefits and drawbacks that associated with the different types of management
accounting systems are enumerated below:
Job costing
Advantages Disadvantages
 Furnishes information about the profit
margin generated from each job.
 Past record of job costing helps in
making estimation about cost or
expenses (Advantages and
Disadvantages of Job Costing, 2018).
 It is highly suitable for cost plus
contracts and give input for taking
pricing decisions.
 Time consuming process
 Requires more clerical work for
getting information about the
expenses
Cost accounting:
Advantages Disadvantages
 Facilitates cost reduction and aid in  Sometimes, such accounting system

pricing decision
 Helps in avoiding wastage, losses
sand inefficiencies (Advantages and
Disadvantages of Cost Accounting,
2018)
 Provides input and thereby advises
about make or buy decision
leads issue of over and under
absorption
 It assumes that full capacity is
utilized, Hence, cost determination is
inappropriate when partial capacity
utilization exists.
Inventory management:
Advantages Disadvantages
 Ensure smooth functioning by giving
indication about the extent to which
stock needs to be maintained within
the firm.
 Ensures cost reduction and profit
maximization (Simons, 2013)
 Inventory management or assessment
is difficult when high level of
competition exists.
 Highly time exhaustive evaluation
Price optimization:
Advantages Disadvantages
 Assists in price determination
 Helps in influencing customers
decision making
 Enhance customer base and loyalty
 Requires in-depth evaluation
 Offers suitable solution only when
one have knowledge about handing
such software in the best possible
way.
Managerial accounting reporting
Reports that are prepared considering MA tools and techniques provide high level of
assistance to the manager in making decisions about day to day operations. Managerial
accounting reports help company in monitoring the performance of departments from
several perspectives and helps in making appropriate financial decisions. MA systems and
tools are highly integrated with the reporting aspects in the following manner:

 Budget report: This report furnishes contains information about both favourable and
unfavourable variance. Budget report provides deeper insight to the managers about
the extent to goals is met pertaining to the specified time frame. Hence, budget report
helps company in setting standards for the future time period (Ward, 2012). It also
helps management team in identifying the training requirement of personnel and
developing suitable incentive plans for them. Thus, it can be entailed that budget
report helps manager in formulating suitable growth strategies that aid in success.
 Receivable report: Accounts receivable report helps in ascertaining the time period
within which debtors are making payment due to them. Hence, such record provides
high level of assistance to Holder Construction in determining whether they need to
make modifications in the existing credit policy or not (Alcouffe, Berland and Levant,
2008). Moreover, working capital position and level of bad debt is highly affected
from the period to which credit is granted to the customers.
 Job costing report: By undertaking and evaluating job cost report manager can assess
the expenses related to specific activities. Job costing report helps in making
evaluation of profitability aspects as it facilitates comparison between actual and
planned revenue (Baldvinsdottir, Mitchell and Nørreklit, 2010). Hence, job cost report
helps in identifying low performing areas and thereby helps in taking measures for
improvement. Further, such report helps in ascertaining areas or projects where funds
need to be allocated for getting high margin.
Hence, by taking into account all the above mentioned reports management team of
Holder Construction can develop competent strategies and policy framework. Thus, both
management accounting systems as well as reports provide assistance to the company in
monitoring performance and making profitable decisions.
4.
a. Preparing statements by using absorption and marginal costing system
Absorption costing: This costing method focuses on the accumulation of cost that is
associated with the production process. Thereafter, such accumulated cost is apportioned into
individual products. Absorption costing method is highly preferred as per accounting
standards for the purpose of inventory valuation (Income Statements under Marginal and
Absorption Costing, 2018). It is also recognized as a full costing method because cost of

finished stock includes all the costs associated with production such as material, labour, fixed
and variable manufacturing overhead.
Marginal costing: Under this method, variable expenses such as material, labour etc
are charged to cost units. Further, as per marginal costing system, fixed cost are written off in
against to the aggregate contribution assessed. Marginal costing system helps in identifying
the level of increase or decrease which takes place in total production costs as per output.
Computation of unit under both the costing methods such as follows:
Particulars
Absorption
(in￡)
Marginal
(in ￡)
Production cost of sales
Fixed 0.65 0.65
Variable 0.20
Cost of one unit of
production 0.85 0.65
Absorption costing
Quarter 1:
Particulars Quarter 1: Amount (in ￡)
Sales revenue 66000
Opening stock
Cost of goods manufactured (78000*.85) = 66300

Closing stock (12000*.85) = 10200
COGS (Opening inventory + purchase –
closing stock) 56100
Gross profit at normal: (Sales – COGS) 9900
Less: Over absorbed production overhead (400)
GP at actual 9500
Less: Fixed selling & administration
expenses 5200
Net profit 4300
¿−absorbed ¿ overheads= Actual ¿ production overheads – Budgeted ¿ overheads
¿ £(78000∗.20) – 16000
¿ £ 15600 – £ 16000
¿ £ 400
Gross profit =sales – cost of goods sold
¿ £ 66,000 – 56500
¿ 9,500
Net profit=Gross profit – total other overheads
¿ £ 9,500−£ 5200
¿ £ 4,300
Quarter 2:
Particulars
Quarter 2: Amount (in ￡)

Sales revenue
74000
Inventory at the beginning of the year
12000 * .85
= 10200
Production cost
(66000*.85) =
56100
Ending inventory (4000*.85) = 3400
COGS 62900
Gross profit at normal 11100
Less: Over absorbed production overhead 2800
GP at actual 8300
Less: Fixed sales & adm expenditure
5200
NP
3100
Working notes:
Gross profit: 74000 – (62900 +2800)
= £8300
Net margin: £8300 - £5200
= £3100
Computation of over-absorbed fixed production overhead:
(66000 * .20) - £16000

= £13200 - £16000
= £2800
Income statement as per marginal costing system
Quarter 1 (in £) Quarter 2 (in £)
Sales revenue 66000 74000
Less: variable cost
Opening inventory 7800
Production cost 50700 42900
Stock at the end of year 7800 2600
COGS 42900 48100
Contribution 23100 25900
Less: Fixed expenses
Fixed production cost of sales 16000 16000
Selling and distribution cost 5200 21200 5200 21200
Net profit 1900 4700
b. Stating reasons due to which profit as per each technique is different
By applying absorption costing system, it has assessed that net profit margin of
Holder Construction was £4300 & £3100 respectively. On the other side, in quarter 1 and 2,
net margin as per marginal costing method implies for £1900& £4700. The main reason
behind the occurrence of difference in the profits, as per such two methods, is variation in the
unit cost. Under absorption costing method, stock (opening and closing) is valued at £.85. In
contrast to this, under marginal costing system, inventories are valued at £.65. Due to this,
profits determined under absorption and marginal costing method varies to some extent.
Referring the overall evaluation, it is suggested to Holder Construction to make focus on
undertaking absorption costing system over others. Moreover, full costing system provides
better view of both cost and profit margin by apportioning both fixed and variable production
expenses to each unit.

c. Reconciliation statement
Profitability reconciliation statement
Quarter 1
Particulars Amount
Net profit as per absorption costing method 4300
Less: Fixed production overhead on ending inventory (12000 units @ .20 each) 2400
Net profit as per marginal costing method 1900
Quarter 2
Particulars Amount
Net profit as per absorption costing method 4300
Add: Fixed production overhead in ending inventory (4000 units @ .20 each) 800
Less: Fixed cost element in opening stock (12000 units @ .20 each) 2400
Net profit as per marginal costing method 3100
SECTION 2
Comparing and contrasting planning tools that can be undertaken in accordance with
management accounting
In the strategic business environment, planning is the key of organizational growth
and success. Budgeting process provides high level of assistance to the manager in making
competent financial plan by including both income and expenses. Along with this, budgets
also enable company to assess discrepancies by comparing actual performance with the set
standards. Hence, deviations and related causes helps company in taking remedial measures
on time as well as helps in developing specific, measurable, achievable, realistic and time
bound budget (Cadez and Guilding, 2008). Thus, by using below mentioned modern
budgeting techniques that can be used by the management team of Holder Construction for
the planning purpose and ensuring financial stability.
Zero based budgeting: Under ZBB, budget is prepared from the scratch with a zero
base which shows that no preceding year’s plans considered by the managers while setting
budgets. As per such modern budgeting tool, by making evaluation of each business activity