Management Accounting Report: Systems, Methods, and Financial Analysis

This report delves into the realm of management accounting, focusing on its application within Excite Entertainment Ltd., a UK-based leisure and entertainment company. The report begins by differentiating between management and financial accounting systems, highlighting the importan...Read More

Management Accounting
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Contents
TASK 1.......................................................................................................................................................3
Section (A) Understanding of management accounting systems.............................................................3
Section(B) Methods used for management accounting reporting............................................................6
TASK 2.......................................................................................................................................................7
Calculation of Income statement using marginal and absorption costs....................................................7
TASK 3.....................................................................................................................................................10
Report on advantages and disadvantages of different types of planning tools for budgetary control.....10
TASK 4.....................................................................................................................................................12
Use of management accounting system to solve financial problem.......................................................12
CONCLUSION........................................................................................................................................15
REFERENCES........................................................................................................................................17
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INTRODUCTION
Management accounting is defined as a process of analyzing financial statements which
includes profit and loss account, balance sheet, cash-flow statement etc. so as to frame an
effective plans and policies for the achievement of an organizational goals and objectives. It gets
supported by financial accounting who is liable to prepare final accounts on annual basis. The
concept of management accounting plays an important role in strengthening financial position of
organisations by contributing efforts in improving financial performance and sustain in
competitive market for longer period of time. The present assignment report is based on Excite
Entertainment Ltd. which is engaged in leisure and entertainment industry in the UK. The
report discusses the various systems and reporting of management accounting along with their
application within an organization. Along with this, the report also briefly explains different cost
accounting methods and its suitability for an organization, planning tools to control budget in
addition with this merits and demerits, application of management accounting systems to resolve
financial issues faced by an organization etc.
TASK 1
Section (A) Understanding of management accounting systems.
(a) Difference between management accounting and financial accounting system
Management accounting system : Management accounting system is the process of identifying
the cost of the operations and the activities which helps in formation of the financial reports. The
reports which are formulated helps the management in decision making.
Financial accounting system : It is a system which helps in analysing the financial information of
the organisation which will help them in preparing financial statement and decision making.
Comparison between management accounting and financial accounting system:
Basis Management accounting system Financial accounting system
Legal
requirement
There is no legal req1uirement to
follow this system in the organisation.
It is compulsory for the organisation
to follow the financial accounting
system as it helps them in formation
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of financial statements.
Format of
presentation
This accounting system do not have an
specific format in which the reports has
to be presented.
On the other hand, accounting system
requires to follow the specific format
which is been specified in the acts that
regulates them.
Types of data
used
The kind of data that is used in this
system includes both financial and non
financial information.
In this financial accounting system
only financial data is used to prepare
the reports.
.
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Excite Entertainment Ltd. have various options to opt among different management
accounting systems in order to strengthen their financial position in market. Using of following
systems of management accounting enable managers to make suitable actions and plans for
future improvements in company’s current performance:
(b) Cost accounting system: This is a system which provides an estimation of total cost
incurred in execution of different business activities. It makes easy for manager of Excite
Entertainment Ltd. to prepare an effective budget by analyzing the total cost incurred in project
held in previous year (Badolato, Donelson and Ege, 2014). This reduces the changes of
incurring unnecessary expenses. There are different type of costs which includes direct cost,
standard cost, process cost etc. Here is the description of these kind of costs in briefly manner:
 Direct cost- It is such kind of cost which can be directly traced to a specific cost center
like product, process, department etc.
 Standard costing- It is a type of costing which is connected with an analysis of variances
between actual and estimated costs. Using such system facilitate an organization to
evaluate the level of differences between the actual and standard cost. It assists managers
to know the exact reason behind the differences of cost of standard and actual. Normally,
the standard cost is lower than the actual cost.
(c) Inventory management system- It is a system which communicates an organization about the
current availability of inventory in warehouses that facilitates the manager to make decision
whether to order further inventory to meet customers’ demands on time. It helps Excite
Entertainment Ltd. in retaining their loyal customers by providing them event services in the
quantity and time they want. Inventory management system consists of two kinds of methods
which includes FIFO (First in first out) and LIFO (Last in first out). FIFO states that the stock
that were acquired by an organization earlier but sold at the time when client latently ordered. On
the other hand, LIFO states that the stock came at last in warehouses will be sold at first. These
methods enable Excite Entertainment Ltd. to maintain adequate amount of inventory in
warehouses so that the chances of failing in suppling ordered products to their clients on time can
be eliminated (Englund and Gerdin, 2014).
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(d) Job costing system- It is a system which provides an information about the cost invested in
different business activities along with the return received by company in future. Using of such
system by Excite Entertainment Ltd. assist their manager to make decision whether to invest
more in conducting an event who ensure success so that maximum profitability can be achieved.
Benefits of management accounting systems:
1. Advantage of cost accounting system- This will help in allocating cost to different
business activities on the basis of outcomes received in previous year by executing the
same activities. This helps Excite Entertainment Ltd. in reducing cost and increase
reserve funds which increases their financial stability in market.
2. Advantage of inventory management system- Using of such kind of system helps
Excite Entertainment Ltd. in maintaining sufficient amount of stock related with
conducting an event in warehouses on regular basis so that the client who had given
orders to an organisation can be delivered on time. Thus, it increases the loyalty of
clients which supports an organisation to achieve high sustainability in market for
longer period of time.
Section(B) Methods used for management accounting reporting.
Management accounting reporting is necessarily required to maintain by Excite
Entertainment Ltd. in order to identify their actual financial position of an organization so that
further actions can be taken for further improvement. It consists of different types which includes
budget report, account receivable report, cost accounting report, job costing report etc. These are
further discussed as under:
Performance report- It is the report which contains information about the current level of
performance of an organisation by facilitating managers to compare their actual with desired
performance level. It assists managers of Excite Entertainment Ltd. to identify the reason behind
non-performance or differences in actual and desired level which makes easy for them to make
an effective decision. This report encourages managers to focus on motivating the employees to
perform better through providing training and development programs, training sessions etc. This
will make positive impact on overall performance level of an organisation (Garrison and et. al.,
2010).
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Account receivable ageing report- It is such type of report which communicates the
information about the list of debtors whose payment is due so that managers can be identifying
such unpaid debtors and take steps to recover the unpaid amount along with agreed interest rate.
This will be more useful for Excite Entertainment Ltd. if preparing such kind of report as it helps
them to update their existing credit policies which ensures them to get payment on due date
without facing any losses.
Cost managerial accounting report- This kind of report provides details about the total
cost invested by an organisation till yet in execution of different business activities. Preparing
such report by Excite Entertainment Ltd. facilitate them to prepare an effective budget on the
basis of information available related with cost incurred in project executed in previous year.
This will save the cost and increases the revenue of an organisation thus more beneficial to
prepare (Hawkey, Webb and Winskel, 2013).
Management accounting system and management reporting system are integrated with
process of organisation;
Both the concepts of management accounting and reporting system are integrated with
each other due to which Excite Entertainment Ltd. requires to get different resources such as
machines, human resources etc. to implement such systems and prepare reporting on timely
basis. For an instance, cost accounting system facilitates an organisation to provide information
about the total cost incurred in different business activities which are later on recorded under the
cost managerial report on the basis of which managers took decision for the betterment of an
organisation (Kanellou and Spathis, 2013).
TASK 2
Calculation of Income statement using marginal and absorption costs
Marginal Costing Method - It is a costing technique wherein the marginal cost i.e.
variable cost is charged to units of cost, while the fixed cost for the period is completely written
off against the contribution. Marginal Costing assist the managers of Excite Entertainment Ltd.
in taking end number of business decisions such as replacement of machines used in organizing
of an event, discontinuing a product or service, etc. It can also help the management in
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ascertaining the appropriate level of activity through break even analysis that reflect the impact
of increasing or decreasing production level.
Absorption Costing Method – It is a technique that assumes both fixed costs and
variable costs as product costs which means that all costs including direct, material costs, and
indirect like overhead costs are included in the price of inventory. It indicates that all of the
manufacturing costs have been assigned to the units produced (Absorption costing, 2018).
Absorption costing avoids the separation of costs into fixed and variable elements. The pricing of
product ensures that all the costs are covered. For Example: Excite Entertainment Ltd. with the
help of absorption costing method can be able to absorb fixed costs in advance and sell their
products on a more realistic “selling price” as well as profits.
Income statements of Excite entertainment company for month of may (Marginal costing
method)
Particular Amount(in £ )
Sales
Less- Variable cost
Contribution
Less- Selling and manufacturing expenditures
Net profit
120000
51000
69000
-
69000
Working note*
 Calculation of sales- 8000*15= 120000
 Calculation of variable cost- (Opening stock+ production overhead- closing stock
: 500*6+ 10000*6- 2000*6= 51000)
Income statements of Excite entertainment company for month of may(Absorption costing
method)
Particular Amount(in £)
Sales 120000
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Less- Cost of good sold
Gross profit
Less- Selling and manufacturing expenditures
Net profit
85000
35000
-
35000
Working note*
a.i. Calculation of sales- 8000*15= 120000
a.ii. Calculation of cost of good sold- (Opening stock+ production overhead- closing
stock: 500*10+10000*10-2000*10=85000)
Management accounting technique and financial reporting documents
Management accounting techniques is considered as most essential tool that aid an
organisation to create their financial statements as well as reports. Thus, it becomes important for
companies to develop and further maintain financial document such as balance sheet, P&L and
more. With the help of accounting tools Excite Entertainment Ltd. can effectively able to
maintain their financial reports. Thus, in order to appropriately develop financial statements
company is required to consider different types of techniques as well as methods with the help of
which they can get best effective financial data as to frame financial statements which is mainly
obtained from management accounting tools.
Financial report which apply to interpret business activities
In business entities such as Excite Entertainment Ltd., numerous set of transactions takes
place on day-to-day manner. Thus, in order to effectively maintain organisational operations
company can interpret their transactions and data. This will further assist them to ascertain the
actual amount which is invested by organisation as to further conduct their daily organisational
operations.
The marginal cost includes features which controls the cost by making division of fixed
cost and variable cost. This method has disadvantage as well as it is more unrealistic in case of
changes in production.
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The Excite entertainment limited company Prefer to adopt absorption costing method as
it consider both variable and fixed cost due to which the net profitability of company is clearly
shown in financial statements. This will easily attract and retain their loyal shareholders.
TASK 3
Report on advantages and disadvantages of different types of planning tools for budgetary
control
Budget – A budget is a balanced estimate of expenditures and receipts of a set period of
time. It is a type of plan that outlines an organization's financial and operational goals. Budgets
are used by Excite Entertainment Ltd. to provide direction and co – ordination so that business
objectives can be turned into practical reality.
Budgetary Control – Budgetary control is the process of preparation of budgets for
various activities and comparing the budgeted figures for arriving at deviations if any, which are
to be eliminated in future. It also helped the companies by ensuring profit maximization through
cost control and optimum utilization of resources (Lavia López and Hiebl, 2014).
Tools to Control Budget
Master Budget - A master budget is the sum of all individual budgets which is made by
the various functional departments within a company. The master budget is the planning tool
which is used by the management of Excite Entertainment Ltd. to direct and judge the
performance of the various responsibility centers that resides within an organization to have
proper control.
Advantages of Master Budgets
 The master budget incorporates the targets of every department of Excite Entertainment
Ltd. and therefore acts as a measure of performance evaluation.
 Budget income statements, budgeted cash flow statements and forecasted balance sheets
of the company are prepared using the master budget.
 It acts as a measure of performance evaluation.
Disadvantages of Master Budgets
 It is not easy for Excite Entertainment Ltd. to modify the master budget even a small
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alteration requires a lengthy process.
 Lack of specificity. For Example: Excite Entertainment Ltd. would not be able to
determine how much the purchasing department is spending on the monthly basis as the
amount will be added to the other departments spending as one sum.
3. Flexible Budget – Flexible budget is a budget that varies according to the changing
needs of company. Excite Entertainment Ltd. can compare actual costs at the actual
volume with the budgeted costs at the actual volume with the help of flexible budgets
(Melnyk and et.al., 2014).
Advantages of Flexible Budget
 Flexible Budgeting can be used to adjust for large purchases when they occur without
requiring any adjustments in following months.
 Flexible Budgets can incorporate all irregular payouts.
 It can be prepared for a range of activities executed in Excite Entertainment Ltd.
 Flexible budget helps Excite Entertainment Ltd. to compare actual output, cost or
performance with standard or budgeted output, cost and performance.
Disadvantages of Flexible Budget
 Flexible budget is prepared on specific time. For example – quarterly or half yearly.
 It shows unfavourable condition of the budget which can imposed bad impact on
investors or suppliers.
3. Variance Analysis - Variance analysis is the quantitative investigation of the difference
between actual and planned behaviour. This analysis is used to maintain control over a
business. For example, if Excite Entertainment Ltd. budget for sales to be $10,000 and
actual sales are $8,000, variance analysis yields a difference of $2,000.
Advantages of Variance Analysis
 Variance analysis facilitates assigning responsibility and engages control mechanism on
departments where it is required. For example, if labour efficiency variance is seen to be
unfavourable or procurement of raw material cost variance is unfavourable, the
management of Excite Entertainment Ltd. can enhance control of these departments to
increase efficiency.
 Variance analysis can be used for comparing the departmental performance of the
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organisation.
Disadvantages of Variance Analysis
 Time delay. The accounting staff complies variances at the end of the month but
management needs the feedback much faster than once a month (Nganga, 2014).
 Comparison of actual results to an arbitrary standard that may have been derived from
political bargaining. The resulting variance may not yield any useful information
(Veprauskaitė and Adams, 2013).
Usage of different planning tools for preparing and forecasting budgets
Budgetary control is a process in which various tool and techniques are required to
prepare financial budget and aim for spending money in coming years. It guides company to
spend their resources in best possible way and also minimize the cost for the company. This help
Excite Entertainment Ltd. from making blueprint and planning for financial planning and
through they can get estimation of money spend throughout business process. There are various
kind of planning tools and method for making financial budget which are forecasting tools,
contingency planning and flexible budget. Therefore, flexible budget help in making different
kinds of budget for operation and their nature change constantly. Forecasting budget provide
insight for future budget and manager make budget according the forecast. At last contingency
planning act as a support for strategies, planning and scheduling various kind of operation which
are required to meet business goals.
TASK 4
Use of management accounting system to solve financial problem
 Calculation of contribution per unit-
Selling price per unit
Less- Variable cost per unit
40
10
Contribution 30
Interpretation- On the basis of above calculation, it has been analysed that company's
selling price per unit is of £40 which is deducted by variable cost per unit to calculate the
contribution per unit of 30.
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 Calculation of break even point- Fixed cost/ contribution per unit
120000/30= 4000 (in units)
Interpretation- From above solved numerical it has been analyzed that breakeven point is
calculated by dividing fixed cost (120000) by contribution per unit (30). Hence the breakeven
point is of 4000 (in units).
4. Calculation of cost volume profit analysis- Fixed cost+ desirable profit/ contribution
(120000+60000)/ 30= 6000 units.
Interpretation- On the basis of this solved financial problem, cost volume profit analysis
is calculated by dividing addition of fixed cost and desirable profit from the contribution. The
CVP is of 6000 units.
5. Profit at the sales of 4000 units-
Sales (4000*40)
Less- Variable cost (4000*10)
Contribution
Less- Fixed cost
Profit/ loss
160000
40000
120000
120000
0
Interpretation- On the basis of above statement, it can be analysed that if company
sells the 4000 units then they will not be able to gain any profit. As well as there will be zero
loss.
 Profit at the sales of 6000 units-
Sales (6000*40)
Less- Variable cost (6000*10)
Contribution
Less- Fixed cost
Profit
240000
60000
180000
120000
60000
Interpretation- From above solved numerical, it has been analysed that company has to
sell 6000 units to gain the desirable profit of £60000.
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Advice- On the basis of this numerical it is identified that the company should sell 6000
units which will help them to achieve their desired level of profits as they are not able to get the
desired profit with 4000 units.
It is an important for an organisation to use different management accounting system in
order to resolve financial issues and make financial position of company stronger. Financial
issues or problems is major concern of an organisation which minimised the profitability of
organisation due to which the manager makes corrective plans to solve these problem as earlier
as possible. Management accounting systems facilitate Excite Entertainment Ltd. to identify the
deviations in standard and actual results and accordingly allow manager to make corrective
actions. There are various financial issues which are briefly explained as under:
Spending more than income: This is an issue which arises financial crisis within an
organisation due to spending more than actual income. It makes direct impact on company’s
profitability.
Unequal cash flow: This problem leads to lack of working capital. This is the situation
which causes financial issues when the cash flow of company doesn’t match with its inflow. This
can also happen when an organisation failed to maintain records of all day to day transactions at
one place.
Methods to deduct the financial problems:
Key performance indicator: This is the technique which is used to measure the
performance level of employees by comparing their actual with company’s expectations. It
includes financial and non-financial indicators. Using such system by Excite Entertainment Ltd.
identifies the causes of deviations in performance level of employees which makes easy for
manager to make suitable decisions for the betterment of an organisation.
Bench marking: This is the technique which is useful to achieve strong market position
by analysing rivalry market situation and set benchmark towards their workforce. Using such
kind of tool assist Excite Entertainment Ltd. to set target or aim towards their employees with
proper guidelines so as to beat their rivals in competitive market. It can also help Excite
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Entertainment Ltd. in resolving issues related with increased expenses by setting up cost of
products and services.
Financial governance: It is termed as the process which defines rules and regulations of
an organisation for better execution of work by workforce. Every organisation such as Excite
Entertainment Ltd. should follow its rules and regulations in order to avoid any financial issues
which can damage their financial stability.
Comparison of two company to solve the financial problems
Basis Excite Entertainment Ltd. Abbott Mead Vickers BBDO
Problems Excite Entertainment Ltd.is facing
financial issue in terms of differences
in cash inflow and cash outflow. This
will lower the liquidity position of an
organisation.
Abbott Mead Vickers BBDO is
also facing financial problem
related with spending more than
actual income which lowers the
financial stability of an
organisation.
Management
accounting system
System helps in managing functional
activities in more effective and
efficient manner. Using of cost
accounting system help in
maintaining day to day transactions
within an organisation and enable
manager to match inflow and
outflow for solving issues.
This organisation can use price
optimisation system which help
them in maintaining the pricing
level of products and services.
This will facilitate in setting up
right prices of products and
services which in results brings
profitable results to company.
CONCLUSION
It has been concluded from the above report that management accounting is an essential
part in success and growth of an organisation as it supports them to make decisions and plans on
the basis of actual financial position which can be identify through analyzing various financial
statements such as profit and loss a/c, balance sheet, cash flow statement etc. The accounting
manager is responsible to choose most suitable costing method among marginal and absorption
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on the basis of profitability shown on financial statement. There are various planning tools to
control budget such as Master budget, Flexible budget etc. which are more useful to prepare
which strengthen the financial stability of an organisation. Along with this, KPI, benchmarking
etc. some tool which also be considered by an organisation in order to resolve financial issues
and make financial condition stronger.
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Online:
Absorption costing. 2018. [Online]. Available through:
<https://www.accountingtools.com/articles/what-is-absorption-costing.html>.
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