Management Accounting Report: Systems, Costing, and Reporting Methods

This report, prepared for the General Manager of Unicorn Grocery, provides a comprehensive overview of management accounting. It begins with an introduction to management accounting systems, emphasizing their importance in business operations and decision-making, particularly in response to external factors. The report details various management accounting systems, including inventory management, price optimization, job costing, and cost accounting. It then explores different methods for management accounting reporting, such as inventory control reports, budget reporting, accounts receivable aging reports, and job cost reports, illustrating how these tools can be used to improve financial control and decision-making within the organization. Furthermore, the report compares and contrasts marginal and absorption costing techniques, highlighting their respective advantages and applications. The report also includes a discussion of planning tools, relevant for budgetary control. The report aims to provide insights into how Unicorn Grocery can implement these techniques to improve cost management, enhance profitability, and make informed business decisions.

MANAGEMENT
ACCOUNTING

Report
From: Management Accounting Officer
To: General Manager
Subject: To write a report to GM covering management accounting and management accounting
system together with different costing techniques and reporting to enable the organization
implement them.

INTRODUCTION
Every organisation want to expand their business, they want to enter in new market so
they can earn more profit in long run. Earlier companies could attain their goals by focusing on
their financial records but now this strategy do not work for many enterprises because of various
external factors like rapid change in technology and government regulations etc. Management
accounting is a process of reducing cost of business operation and increasing the sales if
organisation by using financial and non-financial information (Qian, Burritt and Monroe, 2011).
''Unicorn grocery'' is operating in retail sector, they are running their business in Manchester and
they sell food items and vegetables to their customers. This assignment will explain various
system of management accounting. Various methods of reporting will get discuss under this
report. An income statement will be made in this file, the different between marginal and
absorption costing will also become part of this project. This assignment will also cover some
planning tools which are generally used for budgetary control. Every organisation has to cope up
with financial problems, this report will explain some of the management accounting system
which can be used for resolving these kind if trouble.
TASK 1
P1 Different type of management accounting systems
An organisation basically have two option for enhancing their profit, first is to reduce the
total cost of business and second in increase sale of the organisation. These targets can only be
attain by making proper plan for for facing external factors like environmental changes, social
trend etc. These types of element do not get cover in at the time of solving financial problems.
Managerial accounting is provide great assistance to the manager in making crucial decision. It
does not only assist finance division, it also support other department of the organisation like
marketing, human resource etc. The main aim of financial accounting to depict the revenue
earned and other policy of the company but management accounts concentrate on internal
factors. Most of the people argue that is manager use this form of accounting only for achieving
long term goals but this argument is correct up to a limit. The significant task like managing day
to day cash in proper way is also done by using tools of management accounting.
Manager use this this system for collection and analysation of various kind of data like
information relating to sales and production, so a proper report can be made and company can
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make effective plan and take correct decision by using these records (Burritt, Schaltegger and
Zvezdov, 2011). Management accounting system has lot of benefits. It help in cutting the cost of
production and at the same time it also increase the manufacturing time. Unicorn grocery has to
transfer many information from one place to another, by using this process they can send
significant data to other division without losing an important content. Below are some of the
management accounting system:
MANAGEMENT ACCOUNTING SYSTEM
Inventory
management system
Price optimisation Job costing system Cost accounting
system
Inventory management system – Companies like Toyota earned lot of profit by managing
their stock in a proper way. Unicorn grocery can also make a sound process relating to using
their inventory. This system concentrate of identifying the right quantity and quality that is
needed at the store. Significant expenses like carry and order cost of a company can be brought
down by implementing this system in the organisation (Parker, 2012). Sometimes firms face
troubles of over stocking while other time they have to cope up the issue of unavailability of the
stock. Appropriate inventory management method can help an enterprise in resolving these kind
of problems. It can be done manually or by using old or latest soft-wares.
Price optimisation – Most of the small companies find it difficult to decide the price of a
product which is suitable for both sides i.e. vendor and customers. This kind of management
accounting system help a organisation in projecting the items at the right value in the market.
Sometime buyers argue that they did not buy a commodity because it was expensive, in this time,
an enterprise do not feel that they are selling goods at a high rate. Unicorn grocery also face
other type of issue, sometime manager of this firm feel that they could charge more money for a
commodity from the customers and they could have happily paid this price. This is another type
of loss to the company. Price optimisation is very important for this enterprise.
Job costing system – In this process, they cost is ascertain on a specific production or
service job. It is mainly related to the production unit of the firm, direct labour, material and
overheads are the main area of focus in this system (Aminbakhsh, Gunduz and Sonmez, 2013).
Unicorn grocery is selling many products in at their stores, can use this process for maintaining
the different between organic and other type of food items. The prior ones are generally sold at
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high rate so if their price will get mix normal commodities then it can result in huge loss to the
company.
Cost accounting system – Reducing cost is another way of enhancing profit. This process
starts with estimating the cost of a product so its profitability can be analysed in long run. This
system has lot of scope but its prime focus is on operational activities like managing inventory
valuation.
P2 Methods for management accounting reporting
All the managers of the company want to know the current position of the enterprise.
Unicorn grocery is operating at a small level, management accounting reporting can depict them
the performance of the organisation. Following are some of its method:
Inventory control report – This type of reporting is done for determining the efficiency of
the firm at the time of managing their inventory. Their are various kind of tools like EOQ
(economic order quantity), they can assist the manager of the Unicorn grocery in determining the
right number of product that should be brought to the retail store. This report shows the mistakes
which a company has committed relating to under-stocking or overstocking. These problems
may look small to some manager their affect on supply chain is always negative. Overstocking
increase the cost of business to the company, this is not good for their profit. On the other hand
under-stocking taint the image of an enterprise. If customers do not get some products at the time
of shopping then they may go to shopping at other store where they can find all the products.
This report shows that which product is present in access in the organisation and which item is
less then they actual requirement (Chen, Weikart and Williams, 2014). By identifying flaws
using this report, Unicorn grocery can minimising the ordering and carrying cost.
Budget reporting – Budget is basically the estimation of all the income and expenditure
of a company for a set period of time. Normally it is made for one year but mainly it depends of
the policy of an enterprise. This report shows the different between estimated and actual
performance. Senior managers of Unicorn grocery allot budget to various division of this
company, this form of reporting can assist in determining the correct or improper use of the
funds that is done by managers of different department. By using this report, managers can find
the mistake which they have committed in a time of using allotted budget. Senior manager also
understand significance of this report and they mainly utilise it for determining the incentives to
the staff members of various wings. Budget report of current year can be used for planning the
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budget for next year. This report contain all the major and minor expenses done by cited firm so
it can be compared from the actual result of the enterprise.
Account receivable ageing reporting – Creditor are considered as one of the most
important stakeholder of an organisation. Unicorn grocery understand that if they will not
provide credit service to some of the premium customers then it will hamper growth of their
business. This report contain complete information about various creditor who have to pay some
amount to the company. This report can be made on weekly, monthly or quarterly basis. It
mainly depends of the size, structure and policy of the enterprise (Maiyaki, 2011). If this kind of
managing accounting report is analyse in the proper way then cited firm reduce the amount of
bad debts and they can easily make strong system which will be beneficial for both company and
its customers. Some organisation like to this this report on the basis of amount instead of time,
this is not a wrong approach because it some credit to own much money then company should
not care much amount to them but they own huge amount then their accounts should be regularly
checked by the managers. By using this report, Unicorn grocery can make a sound system for
collection of due money. They can make tuff rules for defaulters who failed to pay due amount in
committed time.
Job cost report – An organisation has to perform various kind of activities for earning
profit, some jobs are significant for the business entity while other only increase cost of their
business (Moser, 2012). Job cost report shows the profitability of every job, it assist manager in
deciding which activity has highest contribution in the revenue. If the problems of employees,
who are doing jobs which is significant for the project, are solved in right time then their
performance will also improve and it will ultimately result in more profit to the company. In
general, this report depicts the expenses that corporation have to incur on a specific project. This
report is utilised for evaluation of the job profitability. If Unicorn grocery will use this report in
appropriate manner then they can easily minimise some of their significant expenditure.
TASK 2
P3 Comparison between marginal and absorption costing
Management accounting focuses on various areas but costing can be considered as one of
its most important part. If a company use appropriate approach of costing then they can get better
results.
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Marginal costing - It focuses on the additional expenditure which a company has to incur
at the time of manufacturing an extra unit. Thin form of costing basically focus on variable cost.
If Unicorn grocery can bring down their variable expenses then they can reduce price of the
commodities which are offering in their stores. Manager can use marginal cost at the time of
making crucial decisions (Cokins, 2013). The price of a product is more then marginal cost of
that item then its production can be increased or continued at same for earning more profit but if
price of the commodity is less then marginal costing then company should stop selling that item
in their store. Fixed cost is only considered in this approach at time of final calculation i.e. in last
step.
Absorption costing – It is old technique of costing and it's also popular by the name of
full costing. All the expenses whether fixed or variable are considered in this form of costing. Per
unit cost in this method can only alter if there is a change in level of production output (Zoni,
Dossi and Morelli, 2012). The prime advantage of using this approach is that it shows correct
profit because it cover all the expenses that is done by company. Direct material, labour and
overhead, all are included in this approach. Fluctuation in fixed cost does not happen in this
method, fixed cost is allot to every unit at the time if its manufacturing. It does not get added in
the last and in total amount like its is done in marginal costing.
Difference between marginal and absorption accounting:
Cost recognition – Marginal cost play crucial role at the the time of making importance
decision (Langevin and Mendoza, 2013). It basically has two component fixed and variable cost.
The prior one is taken as period cost while the later one is taken as product cost. This approach
believe that fixed cost should not be allocated on all the products that are produced in one year
because fixed cost cannot be recover in short time period. It should be covered in a period of
time. On the other hand, absorption costing has completely treatment of fixed cost. Variable cost
is taken as product cost and fixed cost is also treated as product cost. It is seen as period cost like
it is done in marginal costing.
Overhead classification – Absorption costing is mainly related to the production i.e.
factory work while marginal also provide help to manager who are working in marketing and
other departments. In marginal costing, overheads are classified in two elements fixed and
variable. But in absorption costing, it is classification is done in production, administration and
selling & distribution.
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Profitability – Marginal costing ascertain profit by determining profit volume ratio. But if
an organisation will use absorption costing then they will not get same profit because of the
involvement of fixed asset (Delafrooz and Paim, 2011).
Cost per unit – If there is a change in opening and closing stock then cost per unit will
change. This alteration will only happen if a company is using absorption costing. But they are
adopted marginal costing then their will be no variation in cost per unit.
Calculation as per Absorption costing.
Working notes:
Absorption costing
Working 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £2
Fixed cost £3
Total £16
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*16 = £1600
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £2100
Fixed overhead: £2000
Total £100(over absorbed)
Administration Cost: In this budgeted cost is £800 and Actual cost is £700
Selling cost: In this budgeted cost is £400 and Actual cost is £600
Net profit using absorption costing £ £
Sales
(-) Cost of Sales:
0
21000
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Opening stock
Manufacturing
Closing stock
(Under)/ Over absorbed fixed prod.
O/h
Gross Profit
Less Expenses
Variable sales expenditure
Fixed administration expenses
Fixed selling expenditure
Over absorption
Net Profit
11200
(1600)
600
700
600
(100)
(9600)
11400
(1800)
9600
Working 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production O/h 3
Variable production cost 14
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Net profit using marginal costing £ £
Sales value
Less: Variable costs
Opening stock
Manufacturing
0
9100
21000
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Closing stock
Contribution
Less Fixed costs
Variable Production expenses
Administration cost expenditure
Selling cost
Net Profit
(1300)
2000
1300
600
(7800)
13200
3900
9300
By analysing above calculation it can be said that Unicorn grocery should adopt
absorption costing in their organisation because this will help them in depicting more profit. This
approach shows that correct calculation and it will be beneficial for a small firm like Unicorn
grocery. The net profit by this approach is 9600 pounds, it is more then 300 pounds compare to
marginal costing. This difference between net profit happen because of the different treatment of
fixed cost. In marginal costing, fixed expenses are not allocated to every unit, their amount is the
prime reason behind low profit. Another cause behind this variation in the profit is treatment of
closing and opening stock. The inventory which is not used in this year should be treated in next
year (Lambert and Sponem, 2012). But in marginal costing, the expenses incurred on production
of this inventory is treated in this year, this increases the burden on contribution. In absorption
costing, all the expenditure done on closing stock will be treated in next year, this reduce the
total amount of fixed, variable and overhead expenses of current year. Unicorn grocery should go
for absorption costing.
TASK3
P4 Advantages and disadvantages of different kind of planning tools that are used in budgetary
control
Budgetary control is system where the planning income and expenditure is compared
with actual income and expenditure (What is Budgetary control? 2017). If help manager in
checking whether the plans are followed according to the strategy or company need to make any
changes for forthcoming time. Budgetary control ensure that organisation run on a right path. Its
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main objective is to eliminate wastes so the overall profitability of the company be be increased.
It is a centralised system, it does not provide assistance to one or two departments, it assist all the
division of the corporation in checking wastage of resources (Ekbatani and Sangeladji, 2011).
Another aim of budgetary control is to decide the responsibility of every employee in various
wings. It an organisation use different tools of budgetary control then they can easily correct the
deviation.
Capital expenditure is significant for every business, one of the significant goal of
budgetary control is to anticipate the capital expenditure which firm may do in upcoming time.
Unicorn grocery is operating at small level. Importance decision relating to major investment are
crucial for success of their business. If they use different techniques of budgetary control then
they can assure optimum utilisation of the resources which is available to them (Renz, 2016).
They do not have deep pockets so using monetary and other resources in effective manner is very
importance for them. Planning tools are the techniques which is used by managers of the
companies for making plans. Below are some of the planning tools:
Master budget – The importance of this kind of budget is increasing in this era because
of the expansion in the business of organisation. Master budget is made for the whole company.
Normally different department of a company make their own strategy but this budget is made
enterprise as a whole. All the departments get their own funds and their views are taken before
allotting to budget and setting the limit for the expenditure.
Advantages – Master budget assures that all the wings of the corporation move in single
direction. This kind of planning play an important role in resolving and stopping the conflicts
which can happen between two divisions (Hirth, 2013). Master budget reduces the waste of
funds and solve the issues relating to confusion regarding the targets set by different division and
teams.
Disadvantages – This form of planning is very expensive. It is very difficult for
companies like Unicorn grocery to form and implement master budget. The process of making
this budget is also lengthy. Most of the manager do not like to use it because it is time
consuming. They feel that instead of wasting time and money on planning, company should try
to focus on execution of small tactics. One should always remember that budget are only
planning, it do not assure success.
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Cash budget – All the transactions relating to cash are recorded planned in this form of
planning. When a company run their operation in a business environment, inflow and outflow of
cash is normal thing. The main objective of this budget is to ensure that organisation always have
necessary cash so they can run their business in an affective way.
Advantages – Liquid assets are backbone of every business. This budget make sure that
company do not waste their resources in unproductive areas. If small expenditures is managed in
a decent way then it can save huge amount of money of cited firm. If manager of Unicorn
grocery know that they have enough cash then it increases their confidence and they perform
their work in more effective way. This budget also assist in reducing the amount of bad debts by
figuring out potential defaulters.
Disadvantages – Managers often argue that deciding a exact amount of the cash that is
needed in company is impossible task. Cash is a liquid assets it is affected by various external
factors (Foster, Hart and Lewis, 2011). A cash budget is made by using old data i.e. last year
figures, this is very risky because need of cash may vary in next year.
Operating budget – This kind of budget focuses on two significant part, production and
administration. Besides income it also estimates expenditure relating to manufacturing activities.
The main target of this budget to plan all the important activities relating to the key revenue
generating areas.
Advantages – The importance of this budget is high because its only concentrate on the
profit generating tasks. It reduces wastage of resources. This planning is done for a short time so
manager can easily make essential changes in the plans without affect whole planning (Higgins,
2012).
Disadvantages – Formation of this budget enhances the financial burden on a company.
Unicorn grocery do not have much financial resources so if they they make this kind of budget
then it may hamper their expansion plan. Also, the continuous changes in plans sometime
confuses employees.
Incremental cost approach – This method is used in the enterprise who want to reduce the
overall cost of their production. Sunk cost is ignored in this approach and the prime focus remain
opportunity cost. This technique focuses on the changes that happen in cost on due the potential
alternatives. In order to make new budget, incremental amount are added in next years budget.
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Advantages – Funds are transfer to all the departments without doing much analysation
about the exact needs of the division. Normally when company make changes in budget they
have to wait to identifying the changes which is happening in their company but under this
approach they can easily see the alterations on immediate basis.
Disadvantages – Most of the things remain in incremental budget remain almost same
except some additions in the new budget. This results in lack of innovation in the company
because most of employee get habitual of using almost same budget and work in a mundane
environment.
Zero based budgeting: As indicated by this method, entire expenditures have to be justify
which is related to each time period. It is required for an enterprise to examine costs as well as
needs of overall function. There are some pros and cons of this tool which are stated as beneath:
Advantages Disadvantages
It provides accurate results which are much
efficient in nature.
With assistance of this, proper coordination as
well as communication can be maintained.
It consumes maximum time.
To formulate this kind of budget too much
requirement of workforce.
Activity based approach: This method will cater maximum transparency while budget is
formulated. Profits will be produce with assistance of research exercise. There are some benefits
and limitations of this technique which are mentioned as below:
Advantages Disadvantages
 It is much to understand this method.
 This used cost of unit instead of total
cost.
 It can be misinterpreted.
 Implementation of this method is not
easy.
P5 Adopting management accounting systems for responding financial troubles
Business environment has seen terrific changes in last two or three decades. New
researcher and technology forcing many companies to change their work style. Unicorn grocery
is using lean accounting. Vectair holding is another company work is still use traditional
approach of accounting:
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Unicorn Grocery Vectair holding
The approach used by this firm i.e. lean
accounting is a significant factor in reducing
the wastage of cited company's resources. It
also minimises the chances of confusion that
can happen among various divisions.
Traditional approach is filled with old method
of accounting, it is very simple and does not
concentrate on every aspect of the business.
Manager at Unicorn grocery can take fast
decision by using modern approach of
accounting, it also provide them competitive
advantage.
The process of data transferring is slow in this
approach, manager of this company have wait
getting required information. This is not good
for companies business and it sometime result
in huge loss.
Lean accounting is a complicated approach, it
involve various complex process. Its is very
expensive compared to traditional approach.
Understanding traditional approach is not a
hard task, it can be easily implemented I many
firm and a company do not need to provide
extra training to the employees for learning
complicated systems. It does not involve much
cost and thus reduces burden from on the
company.
Morden technology and latest sofa-tares are
significant part of this lean accounting.
Managers at Vectair holding has to use manual
methods for accounting, they also use some
outdated technology which is very slow and
ineffective.
When a company operating in swiftly changing working environment, they have to cope up with
various kind of financial problems (Gaizauskas and Martinavicius, 2013). Small organisation
like Unicorn grocery cannot afford major financial setback because it may derail their business.
Some of the financial issues faced by company is explained below:
 Profitability: Unicorn grocery is facing financial issues of profitability because of
increased fixed costs and variable heads per units. To solve these issue, company might
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apply zero based costing approach. As through this method company can justify entire
expenditures, which is related to each time period. This method would support company
in examine costs as well as needs of overall function.
 Price-Maximisation: It is also known as profit maximisation, as Unicorn grocery is
finding difficulties in increasing its profit due to improper variances in its fixed costs and
variable overheads. This issue could be solved by implementing price optimisation
method, through which it can identify actual cost of each activities and set mark up value
to get desired profit for the company.
 Performance and Control: This issue is very critical for Unicorn grocery. Because
company is unable to perform well and controlling its expenses properly and in future it
might face huge loss. Also its product demand might be decreased in market. To solve
these issue company could implement Inventory management system to control the
performance of company. As through this techniques of management accounting systems,
Unicorn grocery might control over and under stock issues which affects financial
performance of a company.
Following are some techniques of management accounting:
Key performance indicators – These are some of the factors which decide whether the
company is performing their operational and other activities in an effective way. SMART
objectives can assist cited firm in resolving various financial problems. This organisation has to
make some specific goals, like 10% increase in revenue in one year. These targets should be
measurable. Unicorn grocery has to make sure that they are setting attainable and realistic goals.
Setting time limit is very important because it put a positive pressure on the employees and
management of the company. They
Bench marking – Every industry has some standards relating to product quality and price.
If cited firm will follow these standards then it will reduce the problems relating to cash flow and
cost of capital (Fullerton, Kennedy and Widener, 2014). Financial health of cited company will
get in better shape if they keep their standards bit higher then industry's standards.
Financial governance – Unicorn groceries has to consider the interest of stakeholder
because they are significant part of every business (Financial Reporting Center. 2017). If a
company will follow the rules relating to accounting and ethical standards then it will improve
their goodwill and it help them in fighting different type if financial problems.
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CONCLUSION
At the end, it can be concluded management accounting systems have capability to
improve the performance of a company. Their are different method of management accounting
reporting and they help an organisation in finding and rectifying the blunder which they are
committing on continuous bases. Their are many differences between marginal and absorption
costing, one should adopt an approach by checking their fitablity in the business. Planning tools
decrease the fear of uncertainty and they also provide a correct path to the employees of the
company. By using tools of management accounting, most of the financial troubles of a company
can get resolve in short period of time.
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REFERENCES
Books and Journals
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