Management Accounting Report: Financial Analysis of Tech U.K. Limited

This report provides a detailed analysis of management accounting principles and their application within Tech U.K. Limited. It begins by comparing financial and management accounting, highlighting the importance of management accounting in decision-making processes. The report then explores various cost accounting systems, including actual, standard, and normal costing, along with different inventory management systems like FIFO, LIFO, and weighted average methods. The report also examines job costing systems, including batch and contract costing. Furthermore, it discusses different types of managerial accounting reports, such as budget reports, accounts receivable reports, and job cost reports, emphasizing their significance in decision-making, cost reduction, and increasing financial returns. The report delves into cost calculation methods, including marginal and absorption costing, and presents an income statement based on marginal costing. Finally, it covers different types of budgets, their advantages, disadvantages, and their importance in planning and controlling, and the use of management accounting in responding to financial problems.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and essential requirements of management accounting systems..1
P2. Types of managerial accounting reports..........................................................................4
TASK 2............................................................................................................................................5
P3: Calculating cost and preparing the income statement .....................................................5
TASK 3............................................................................................................................................8
P4: Different types of budgets and their advantages and disadvantages...............................8
TASK 4 .........................................................................................................................................10
P5: Use of management accounting in responding financial problems...............................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is the accounting that is done for supporting or helping the
internal management in taking decisions that are relevant for the efficient functioning of the
organisation. The primary motive of managerial accounting is to summarise the accounting
information so that it becomes useful for the managers of the company to taking suitable actions.
The nature of management accounting is quantitative , which means it focuses on theoretical
informations of past present and future rather then numerical accounting. In this research report
we are discussing about the management accounting systems of Tech U.K. Limited. In which we
will discuss regarding the differences between management and financial accounting, the
importance of management accounting information in making decisions, relevance of cost
accounting systems,( Askarany, and Yazdifar, 2010 ) inventory systems, job costing systems. We
will also present financial informations about the company which is understandable easily,
preparing income statements. Also we will research about the budgets and their advantages and
disadvantages, how to prepare them, and its importance in planning and controlling. We will use
a comparison approach, by using relevant financial information about the organisation that we
will use for research.
TASK 1
P1: Management accounting and essential requirements of management accounting systems
Comparison between financial and management accounting
Basis of comparison Financial accounting Management accounting
Interested parties Financial system of accounting
are used by the external users
such as shareholders, investors
, suppliers etc.
Management system of
accounting are used by the
internal users of the company.
The example of internal users
are directors ,managers,
supervisors and employees of
the company.
Time focus Financial accounting is done
on historical perspective of the
Management accounting is
done by keeping in view future
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company such as for a
previous accounting year.
emphasis as it is used
internally for decision making.
Verifiability vs Relevance This system puts emphasis on
verifiability of financial
statements.
This system puts its emphasis
on relevance for planning and
controlling operations of the
company.
Precision Vs timeliness Financial accounting puts its
importance on precision .
Management accounting
focuses on timeliness of the
reports.
Nature of information: The nature of data in the
financial accounting is
aggregative , collective and
quantitative as it is presented
in the financial statements.
The nature of data in
management accounting is
based on the activities of
management and it is
quantitative.
Scope: Financial accounting has a
narrow and defined scope.
Management accounting has
wide scope as it uses future
information also.
Standards: Financial accounting is done
by considering certain pre
specified standards such as
US-GAAP and IFRS.
Management accounting does
not have any pre specified
standards.
Importance of management accounting in decision making
Management accounting is done for the internal management so that they can use the
information provided in making accounting reports, that are relevant for the decision making in
the company:
Determining aim: By taking the help of management accounting, the managers of the
company easily determine the aims that are needed to be achieved in the near future( Becker
Messnerand Schäffer, 2010 ).
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Ease in planning: The management accounting information that is provided to the
managers includes the future economic regulations , which helps the management in formulating
plans keeping in view those things.
Performance Measurement: This system of accounting also provides the guidelines for
working in the company for the employees according to their job responsibility which helps in
measuring their performances( Hopperand Bui, 2016 ).
Different cost accounting systems
Actual costing: This costing system measures the actual cost that is incurred in the
operations of the company. The actual costing method evaluates the true cost involved in each
job by measuring different costs such as direct material, direct labour and other overheads.
Standard Costing: In this cost accounting system, the standards are defined by the
managers for each type of cost in the company. After setting the standards costs for each cost
such as material, labour, overheads etc. These are compared with the actual costs that is
originally incurred by the company. Although the company has to pay the actual cost, but it work
as a comparing measure for the costs and accordingly measures are taken for the increased costs
of the company.
Normal Costing: This costing method uses the rates that are assigned to manufacturing
overheads such as material , labour etc. at the starting period of the year to the product. The
actual prices are used for the material and labour and only the overhead rate is estimated as
determined earlier.
Inventory management systems
The management of inventories in the company is very essential for meeting the
requirements of the raw materials for the manufacturing departments and finished goods
inventory management for meeting the requirements of the customers of the company. The
inventory management systems helps in maintaining the levels of the inventory so that they can
satisfy the demands of the market. The different inventory valuations systems are discussed
below:
FIFO: This valuation technique means first in first out, meaning the goods which came
in first in the inventory will go out of the inventory first. In FIFO, the goods which came first in
the stock is assigned the cost of goods sold, and the goods which came in last are transferred to
the closing stock.
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LIFO: The meaning of this inventory system is Last In First out, according to this the
goods which came in inventory at the end will go out of stock first. The goods which came in
later in the stock are assigned the value of cost of goods sold and goods that came earlier are
transferred to closing inventory.
Weighted average system: This system takes the weighted average of the stock of total
goods in the inventory and then they are assigned to COGS and closing inventory.
Job costing system: The Job accounting system helps in allocating the cost of production for a
particular product or a set of the products. This system of accounting measures the cost of direct
material and direct labour that is involved in the production of a particular product. The
management analyse the amount of profit that is to be received from a product in the coming
future and then they accordingly allot the cost that can be expensed in the production process(
Kaplan, 2012 ).
Batch costing: This is an effective costing that is estimated for the batch of products, in
each batch there are number of identical units but every other batch will be different from other
batches.
Contract costing: Contract costing estimates the cost that are incurred in the specific
contracts with the customers.
Service costing: This costing technique determines the cost that is involved in providing
the services to the customers.
P2. Types of managerial accounting reports
Each transaction whether it is financial or non financial , it has to be reported for using it
for future purposes. This is why it is important for Tech UK to prepare the necessary reports for
the efficient operations of the company. There are different reporting mechanisms that are used
by the company, which are as follows:
Budget report: The budgets are prepared for every departments in order to make
estimate about the expenditures that are to be incurred in each of them. It is necessary to make a
reports about these budgets in order to analyse the costs that are incurred during the last
accounting year. This will help in presenting the scenario of the future business activities to the
employees of organisation( Lee, 2012 ).
Accounts receivable report: This report is essential for the organisations because it
keeps track of the amount that is to be received from the debtors of the company. It enables the
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company in reminding the management about the unpaid debtors of the company and on which
particular date the amount has to be collected from them. This report also enables the company
in estimating the bad debts that is incurred during the financial year and accordingly the
company becomes stricter in determining the debtor collection period of the company.
Job cost reports: The job costing report provides necessary information about the total
cost or sales about the specific product or a group of product. This is essential for the managers
to determine the profitability in the specific job in comparison to the cost so that the managers
can decide regarding the amount that should be invested in that project. Therefore the allocation
of the amount of capital in a specific product is according to its profitability over the time(
Libby, and Lindsay 2010).
Importance of information of management accounting reports:
Decision making: Management accounting reports provides financial as well as non
financial informations to the management of the company which in turn helps in the decision
making for the setting the organisational objectives of the business. The management accounting
reports such as account receivable reports provides information about the companies unpaid
debtors, which helps the management in formulating Strict policies regarding debtor collection
period.
Reduces cost: The accounting reports helps the management in anticipating the problems
that can be occurred in the future and therefore effective plans are made by the management in
eliminating the problems and it thereby reduces the cost that would have been incurred if the
problems were arise in the future.
Increasing financial returns: The budget reports also provides financial informations
and therefore it enables the management in choosing projects which are profitable and suitable
according to the future economic conditions thereby increasing the financial return of the
company.
TASK 2
P3: Calculating cost and preparing the income statement
Cost: This is the amount which the company invest in the production process to produce
the products which are of good quality and in providing services to the customers. It is the total
cost that is incurred in all the activities starting from the production process till the product is
sold to the end consumers.
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Marginal costing: This is the cost that is incurred in the producing one additional unit of
the product with the available resources. The marginal cost of product includes the variable cost
as the fixed cost remains constant till a certain additional production. The companies like Tech
UK should produce additional units till the profit from the production of additional unit is more
then the cost that is incurred in the production.
Absorption costing: This method takes into account the actual cost of products, both the
variable and fixed cost are taken into consideration in absorption costing . Thus it can be seen
that because of adding fixed cost to the price of the product the profitability can be low as in
comparison with the marginal costing method( Mistry, Sharma, and Low, 2014 ) .
Income statement on the basis of Marginal costing method:
Working 1: Calculate variable production cost £
Direct material cost 8
Direct labour cost 5
Variable production O/h 2
Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 2000*15 = 30000 500*15 = 7500
Net profit using marginal costing £ £
Sales value
Less: Variable costs
Opening stock
Cost of production
Closing stock
Variable sales overheads
Contribution
0
30000
(7500)
52500
(22500)
(7875)
22125
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Less Fixed costs:
Fixed Production overheads
Fixed Selling overheads
Net loss
15000
10000 (25000)
(2875)
Income statement on the basis of Absorption costing method:
Selling Price per unit £35
Unit costs
Direct materials cost £8
Direct Labour cost £5
Variable Production overhead £2
Variable sales overhead £5.25
Budgeted production for the period is 3000
units
Fixed cost for a month:
Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000
Selling cost: In this budgeted cost is £10,000 and Actual cost is £7875
Absorption costing working notes
Working Note 1: Calculate full production cost
Direct material £8
Direct labour £5
Variable cost £2
Fixed cost £5
Total £20
Working Note 2: calculate value of inventory and production
Opening inventory Production Closing inventory
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0 2,000*20 = £40000 500*20 = £10000
Working Note 3: under/ over absorbed fixed production overhead
Actual fixed production: £15000
Fixed overhead: £10000
Total £5000(under absorbed)
Net profit using absorption costing £ £
Sales value
(-) Cost of Sales:
Opening stock
Cost of production
Closing stock
(Under)/ Over absorbed fixed prod.
O/h
Gross Profit
Less: selling Expenses
Variable sales expenditure
Fixed selling expenditure
Net loss
0
40000
(10000)
7875
10000
52500
(30000)
(5000)
17500
17875
(375
Reconcile statement:
Reconciliation statements Amount
Profit under absorption -375
Closing stock 500*5 2500
Profit under marginal 2125
From the given statement, it has been seen that after changing closing stock valuation of
2500. The profit under marginal costing after making settlement of fixed cost it comes as 2125.
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TASK 3
P4: Different types of budgets and their advantages and disadvantages
There is need to prepare various kinds of projects that are needed to be prepared by the
management of the company such as Tech UK limited so that the activities of business become
more effective( Quagli, 2011 ). The examples of different projects that are to be prepared by the
management are flexible budget, master budget, operational budget, cash flow budget etc. These
are discussed below:
Master Budget: The master budgets are prepared to forecast the future sales ,
requirement of capital, production level, in the execution of the business activities. The master
budget is inter related with many other budgets of the company.
 Advantages : It helps in estimating the overall cost that is incurred in the
production process.
 Disadvantages: Master budget does not determine the cost of any specific activity
thus the accuracy and reliability is decreased.
Cash Flow Budget: This budget determines the total cash inflow and outflow from
various activities that are responsible for the operations of business. The cash is the most liquid
and acceptable asset of the company which is required to meet the day to day expenses. Its
inflow and outflow is managed by the company using this budget.
 Advantages : This budget helps in analysing the total cash inflow and outflow thereby
maintaining the cash in the company.
 Disadvantages: The cash flow budget only measures the expenses and income that are
incurred in cash. It does not measure anything that does not involve cash.
Fixed Budget: This budget is an effective which is not modified according to the sudden change
requirements of the company. It does not allow the change of financial plans in executing
business activities.
 Advantages: This budget is helpful in measuring success and growth of the business in
long term.
 Disadvantages : The major problem of this budget is that it can be changed frequently
according to the demands of the markets( Quattrone, 2016 ).
Different pricing systems:
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Cost Plus Pricing: This pricing method takes into consideration the cost associated with
direct material, labour and overhead cost and these are included in prices of procduct and
services.
Marginal cost pricing: This is the pricing which is done for the products which are
produced additionally after the total production. The additional cost of producing product is
determined and then pricing is done.
Importance of budgets in planning and control:
Limiting expenditures: The budgeting helps the companies in reducing expenditures
because the budgets determine the amount of cost that should be incurred in the activities thereby
providing the standards to the employees which in turn limits the expenditure.
Planning for future growth: The preparation of budgets can help in the formulation of
plan that helps in the future growth of the business by determining the future economic and non
economic policies of the markets.
TASK 4
P5: Use of management accounting in responding financial problems
As per study done on the recent reports of the company Tech UK it has been observed
that the company is facing a loss of 1.5 millions because of which the financial positions of the
company is degrading. Thus, to prevent such financial issues and problems , there are various
financial tools which are to be adopted by the company( Robalo, 2014 ). By doing a comparison
of Tech UK with the another company in the same industry, the financials of 4Com plc are
shown below:
Profit & Loss a/c:
Date of
Accounts
Year
Ending
30 Jun
2012
£
Year
Ending
30 Jun
2013
£
Year
Ending
30 Jun
2014
£
Year
Ending
30 Jun
2015
£
Year
Ending
30 Jun
2016
£
Turnover 22604530 24678667 28375290 33523000 41041000
Profit
Before Tax 628578 482643 220284 892000 -1014000
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