Tech Ltd Management Accounting: Decision Making and Financial Issues

This report provides a comprehensive analysis of management accounting practices relevant to Tech Ltd, a company specializing in mobile phone chargers. The report begins by defining management accounting and differentiating it from financial accounting, emphasizing its role in internal decision-making. It then explores the importance of management accounting information for Tech Ltd, covering areas such as make-or-buy decisions, cash flow forecasting, variance analysis, and resource allocation. Various management accounting systems, including cost accounting, inventory management, and job costing, are examined with their respective advantages and disadvantages. The report further illustrates how managerial reporting aids in decision-making through job cost reports, inventory reports, accounts receivable ageing reports, and budget/performance reports. It also explains the significance of understandability in managerial reports. The report includes a profitability statement prepared using both marginal and absorption costing methods, along with an interpretation of the results. Finally, the report discusses different types of budgets, their advantages and disadvantages, and the budget preparation process, highlighting their importance as decision-making tools. The report concludes with a comparison of how organizations adapt management accounting to respond to financial problems, offering valuable insights for Tech Ltd to improve its financial performance and decision-making processes.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
a....................................................................................................................................................3
1. Defining management accounting and differentiating it from financial.................................3
2. Presenting the importance of management accounting information as a decision making tool
.....................................................................................................................................................4
3. Cost accounting system...........................................................................................................5
4. Inventory management system................................................................................................6
5. Job costing system...................................................................................................................6
B...................................................................................................................................................7
1. Presenting the manner in which managerial reporting aid in decision making.......................7
2. Stating reasons behind the inclusion of understand-ability characteristics in managerial
reports..........................................................................................................................................8
TASK 2............................................................................................................................................8
Preparation of profitability statement as per marginal and absorption costing method..............8
Presenting different kinds of budgets and their advantages and disadvantages........................10
Describing budget preparation process and costing system that can be used for taking pricing
decisions....................................................................................................................................12
Stating the importance of budget as a decision making tool.....................................................13
TASK 4..........................................................................................................................................13
Comparing the manner in which organisations use adapt management accounting for
responding financial problems...................................................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting tools are widely used by the business organization around the
globe. In the recent times, both profit and non-profit making organizations, undertake managerial
accounting tools for making effectual use of financial resources. Moreover, it renders
information about day to day activities as well as operations and thereby aid in decision making
aspects. The present report is based on the case scenario of Tech ltd which provides customers
with special chargers for the mobile phone. Business entity of Tech Ltd owns & operates retail
outlets in UK and now concerned about making improvement in the decision making aspect as
well as overall performance. In this, report will describe different type of management
accounting systems along with the essential requirements. Further, report will present the manner
in which different types of accounting system aid in managerial decision making.
TASK 1
a.
1. Defining management accounting and differentiating it from financial
Management accounting lays emphasis on analyzing and evaluating monetary
information related to the internal operations. Such field of accounting provides manager with
appropriate cost information for planning, controlling and decision-making purpose.
On the contrary to MA, financial accounting focuses on providing information about
business transactions to both internal and external stakeholders (Hilton and Platt, 2013). Hence,
financial accounting places emphasis on recording, summarizing and presenting information
about business transactions over the time frame.
Difference between management and financial accounting can be presented on the basis of
following aspects:
Basis of difference Management accounting Financial accounting

Motive Company’s motive behind the
adoption of MA tools is to
develop competent plan and
formulating suitable goals for
the near future.
This field of accounting
provides deeper insight about
Need Preparation of management
accounting reports are optional
Unlike MA, business entity is
required to maintain accounting
records and publish report at the
end of an accounting year.
Stakeholders Managerial reports are used by
the departmental managers for
decision making
In FA, stakeholders include
both internal and external such
as management, personnel,
shareholders, suppliers etc.
Regulations No need of following specific
rules, regulations and guidelines
(Wickramasinghe and
Alawattage, 2012)
Under this, for the purpose of
appropriate account preparation
and report there is a need to
comply with GAAP, IFRS and
IAS.
Time frame As per the need and
requirement of management
reports are prepared on weekly,
monthly and quarterly basis.
Financial accounting reports are
prepared on annual basis
2. Presenting the importance of management accounting information as a decision making tool
In the context of Tech Ltd, significance of management accounting is high pertaining to
decision making aspect. For attaining success and ensuring smooth functioning of operations
business entity is required to make prominent decisions. Hence, by taking into account
management accounting tools departmental managers of Tech Ltd can take decision about the
following aspects:

 Make or buy decision: MA field helps in ascertaining the cost of manufacturing chargers
in house as well as outsourcing. This in turn helps managers is taking suitable decision
from the perspective of cost saving and profit maximization.
 Cash flow forecasting: Management accounting facilitates forecasting of cash flows and
thereby helps in taking suitable decisions. In other words, through the means of
budgeting tools and techniques Tech Ltd’s manager can make estimation about income
and expenses.
 Assists in understanding performance variances: Departmental manager can assess and
evaluate performance of each department with the help of variance analysis (Fullerton,
Kennedy and Widener, 2014). Thus, by identifying deviations firm can take corrective
action within the suitable time frame.
 Helps in analyzing rate of return: MA assists in finding best option out of several which
is offering high returns on the investment over others.
 Facilitates cost control: Departmental managers can avoid redundant business activities
with the help of MA tools and thereby becomes able to control cost.
 Optimal allocation of resources: MA helps in identifying profitable operations and helps
in making allocation of resources in the suitable activities.
3. Cost accounting system
This accounting system is used by the business organizations such as Tech ltd for making
estimation about the cost of products or services for profitability analysis. It mainly includes
normal and standard costing system which firm can use for evaluation purpose. Normal costing
system is highly effectual which in turn helps in valuing manufactured products on the basis of
predetermined rate (Christ and Burritt, 2013). Further, standard costing system helps in
evaluating or comparing actual income as well as expenses with the budgeted figures. Hence, by
assessing deviations Tech Ltd can strategic decision for improvement within the suitable time
frame.
Advantages
 Cost accounting system provides assistance in eliminating wastage, losses and
inefficiencies to a great extent

 It lays emphasis on undertaking cost effectual methods of production. This in turn leads
cost reduction and profit maximization.
 This managerial accounting system helps in identifying reasons behind profit or loss.
Disadvantages
 Cost accounting system furnishes information about past performance whereas
management is concerned in relation to taking decision about future
 Involves issue regarding under or over absorption of overhead
 Installation regarding cost accounting system imposes high monetary expenses in front of
the firm. Moreover, it demands for the maintenance of many costing records.
4. Inventory management system
In the context of business unit, inventory management is highly vital for managing cost
and ensuring the smooth functioning of operations. There are several methods which can be used
by Tech Ltd for inventory management and valuation such as FIFO, LIFO, perpetual etc. By
employing FIFO method business unit can avoid the risk of obsolescence to the significant level
through selling firstly purchased or manufactured products on prior basis (Banerjee, 2012). In
addition to this, economic order quantity, just in time etc methods helps in making proper
inventory management. EOQ helps in assessing the number of raw and finished units need to be
maintained within the firm for ensuring smooth functioning of operations.
Advantages
 Helps in avoiding wastage and losses Assists in reducing the level of production bottlenecks
Disadvantages
 Time intensive exercise
 Inventory software installation and training of personnel imposes cost in front of Tech
Ltd

5. Job costing system
It implies for the specific costing system which is used when production carried out in
accordance with the customer’s requirements. Under job costing method, manufacturing
expenses are assigned to the individual product or services (Job costing, 2018). Hence, Tech Ltd
can assess cost and take suitable pricing decision by undertaking job costing system. For
instance: Manufacturing cost in relation to 100 units of charger implies for £20000. In this, per
unit manufacturing cost can be assessed in the following way:
Unit cost of charger: 20000 / 100
= £200
Advantages
 Helps in making estimation about the cost of similar jobs
 Job costing method facilitates detailed evaluation of labour, material and overhead cost.
 Assists in undertaking budgetary control tool for performance evaluation
Disadvantages
 This costing method demands for more clerical work
 Highly expensive in nature because records need to be kept at the every step of order.
B.
1. Presenting the manner in which managerial reporting aid in decision making
Manager of Tech Ltd places high level of emphasis on undertaking managerial reports for
getting information about internal operations and taking decision about future growth or success.
Hence, specifically there are mainly four managerial reports which Tech Ltd can prepare for
effective decision making.
 Job cost report: Manager of Tech Ltd can assess cost associated with the specific project
by using such report. Job cost report offers opportunity to the manager to evaluate
profitability by doing comparison with the budgeted figures. Using job cost report, Tech
Ltd’s manager can assess high performing areas and thereby become able to focusing
efforts into the same. In addition to this, manager can assess projects

 Inventory report: By undertaking such report, Tech Ltd can make manufacturing process
more efficient and smoother. Stock report provides information about wastage, hourly
labour and per unit overhead cost (Figge and Hahn, 2013). Hence, this report assists
manager in doing comparison of different assembly lines and assessing best performing
departments. Thus, inventory report enables business unit to find out the most effectual
ways of performing activities and thereby exerts control on cost level.
 Accounts receivable ageing report: Tech Ltd can ensure prominent cash flow
management by using accounts receivable ageing report. Concerned report is highly
suitable for the companies which grant credit to their customers. Receivable report
presents the time frame for which customers are taking products or services on credit
basis. Hence, problems which take place in the monetary collection process can easily be
assessed through receivable reports. Thus, by assessing the capacity of debtor in relation
to making payment on time Tech Ltd can decide whether it should tighten credit policies
or not.
 Budget or performance report: This report enables manager to analyze departmental and
thereby overall company’s performance. Budget report furnishes information about the
extent to which actual expenses incurred and revenue generated is in line with the
budgeted figures. Thus, referring performance report manager of Tech Ltd can set
suitable standards for the near future. Besides this, it also helps in ascertaining feasible
ways to trim cost and setting incentive plans for each department.
2. Stating reasons behind the inclusion of understand-ability characteristics in managerial reports
Tech Ltd prepares managerial report with the motive to take effectual decisions which
makes contribution in the attainment of organizational goals and objectives. Hence, management
accounting team needs to ensure that report contains the feature of reliability, comparability and
understand-ability (Caglio and Ditillo, 2012). In other words, it can be depicted that team of
management accounting reports about cost, departmental performance etc should be presented in
a clear & precise way that manager can easily understand and thereby becomes able to take
appropriate decisions.

TASK 2
Preparation of profitability statement as per marginal and absorption costing method
Income statement according to absorption costing method
Particulars
Figures
(in £) Figures
(in £)
Sales revenue 52500
Production cost (2000 * 20) 40000
Less: Ending inventory (500*20) 10000 30000
Gross profit (Sales – COGS) 22500
Less: Under absorption 5000
Net gross margin 17500
Less: selling, distribution and administration
expenditure
Fixed 10000
Variable 7875 17875
Net loss (375)
Manufacturing cost per unit: Material + labour + fixed and variable production overhead
5 + 8 + 2 + 5
= 20
Marginal costing
Particulars
Figures
(in £)
Figures
(in £)
Revenue 52500
Less: Variable expenditure
Direct labour 10000
Material cost 16000

Variable production overhead 4000
Less: inventory at the end of period 7500 22500
Contribution (sales – variable cost) 30000
Variable selling & distribution expenses (52500 *
15%) 7875
Net contribution 22125
Less fixed cost:
Fixed Production Overhead 15000
Fixed Selling, distribution and administration
expenses 10000 25000
Net loss -2875
Computation of variable cost per unit
Variable cost per unit: 5 + 8 + 2
= £15
Interpretation: From assessment, it has found that gross profit margin, under absorption
costing method, accounts for £22500 respectively. On the other side, in marginal costing method,
contribution implies for £30000 significantly. The rationale behind such difference is the
inclusion of fixed manufacturing overhead such as £5 in absorption costing method. Further, as
per absorption costing method net loss of £375 will be suffered by Tech Ltd. In contrast to this,
under marginal costing method level of net loss will be £2875. Hence, for the attainment of
profit margin business unit need to exert control on expenses.
Reconciliation statement
Particulars Amount
Net loss as per absorption costing method (375)
Less: Fixed production overhead on ending inventory (500 units @ 5 each) (2500)
Net loss (marginal costing method) (2875)
Presenting different kinds of budgets and their advantages and disadvantages
Budgeting tools which Tech ltd can use for planning purpose are enumerated below:

Capital expenditure budget: It helps in assessing the amount of cash which business unit
will invest in projects and long-term assets. Hence, it clearly presents time and amount when
fixed assets will be purchased.
Advantages
 Facilitates effective cash management
 Assists in making plan about fixed assets investment (Capital expenditure budget, 2018)
Disadvantages
 Includes more numeric assessments
 Time intensive activity
Operational or functional budget: For the purpose of effective financial planning Tech
Ltd can prepare operational or functional budget. As it helps in assessing expected income and
expenses over a particular time period (Operating budget, 2018).
Advantages
 Exerts control on undesirable spending
 Assists in managing the growth of business
Disadvantages
 Time-consuming
 Expensive exercise
Cash flow budget: Tech Ltd’s manager can make proper estimation about inflow and
outflow by preparing cash budget. Hence, using cash budget manager can do panning about
further investment projects. Cash budget has following advantages and disadvantages such as:
Advantages
 Cash budget helps management in concentrating their attention on significant or
relevant matters
 Facilitates co-ordination among the activities of all departments

 Assists in improving communication and developing harmonious relationship among the
personnel
Disadvantages
 Cash budget includes subjective estimation
 It takes longer time period to achieve the goals
 Negatively impacts employee productivity and morale when targets are not realistic in
nature
Master budget: It is the aggregation of all the lower-level budgets produced by the
various functional areas of business organization. Such budgeting framework is the central
planning tool which manager of Tech Ltd can use to direct the activities of business unit.
Advantages
 Master budget provides high level of assistance in identifying problems and planning for
the near future.
 Provides overall overview of firm’s budget ( Income and expenses of all the
departments)
Disadvantages
 Lack of specificity
 Difficult to update because master budget includes several financial frameworks such as
production, sales, cash etc.
Describing budget preparation process and costing system that can be used for taking pricing
decisions
Budget preparation process in the context of Tech Ltd is as follows:
 First stage of budgeting process includes making estimation about cash inflows and
outflows.
 Once estimation has been done thereafter manager submits financial plan to committee
for approval.