Management Accounting: Systems, Cost Analysis, Budgeting, ThirdWay

This report provides a comprehensive overview of management accounting, focusing on its systems, cost analysis techniques, and budgeting methods. It begins by explaining management accounting and different types of management accounting systems, including cost accounting, job costing, and inventory management. The report then discusses various methods of management accounting reporting, such as budget reports, accounts receivable reports, job cost reports, and inventory reports. Furthermore, it delves into cost analysis, comparing marginal and absorption costing methods, and explains how to calculate costs using these techniques to prepare income statements. The report also explores the advantages and disadvantages of different types of budgetary planning tools. Finally, it compares various methods of management accounting systems to respond to financial problems, offering insights into how businesses can leverage these systems for effective financial management and decision-making. This document is available on Desklib, a platform offering study tools and solved assignments for students.

Management Accounting
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TABLE OF CONTENTS
INTRODUCTION................................................................................................................................1
TASK 1.................................................................................................................................................1
P1 Explain management accounting and different types of management accounting systems.......1
P2 Explaining different methods of management accounting reporting..........................................3
TASK 2.................................................................................................................................................5
P3 Calculation of costs using appropriate techniques of cost analysis to prepare income
statements.........................................................................................................................................5
TASK 3.................................................................................................................................................8
P4 Explaining advantages and disadvantages of different types of budgetary planning tools.........8
TASK 4...............................................................................................................................................10
P5 Comparing various methods of management accounting systems to respond financial
problems.........................................................................................................................................10
CONCLUSION..................................................................................................................................12
REFERENCES...................................................................................................................................13
TABLE OF FIGURES
Figure 1 Types of management accounting system..............................................................................2
Figure 2 Job order costing....................................................................................................................3
Figure 3 Inventory Management system..............................................................................................4
Figure 4 Types of managerial accounting reports................................................................................6
Figure 5 Decision-making under standard costing.............................................................................12
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INTRODUCTION
Considering current complex industrial world, managerial accounting becomes an integral
important component of corporate management that present precise economic information to the
business managers for competitive decisions. Administrative team use various kinds of reports to
make decisions to increase efficiency, productivity, efficient cash flow management, cost control
and other decisions. In the technological led world, there are different systems which are use by the
company to derive financial & statistical information such as inventory reports, manufacturing cost
and others. Systems are useful to maintain automatic or computerized record of daily functions and
assure data safety and security. ThirdWay Interiors is a UK-based company that aims to create
innovative workplace for the clients. The central focus of the current research is to identify the need
of different systems of managerial accounting that firm use to generate reports for performance
management. Managers not only need to examine existing performance but use it to create plans for
future using justifiable budgeting method. Thus, it will carry out critical examination of different
methods of budget creation. Moreover, marginal and absorption techniques will be differentiated
and used for computation of cost.
TASK 1
P1 Explain management accounting and different types of management accounting systems
To: General Manager, ThirdWay Interior
From: Management Accounting Officer
Date: 12th February 2018
Subject: Management a/c systems
Introduction
MA is mainly concerned with reports creation that provides meaningful statistics to the
business managers to formulate policies, put control and maximize effectiveness. This section
primarily aims to highlight main systems that can be use by ThirdWay Interior to derive success.
Management accounting system
The concept of management accounting came during 19th century, initially, it was started as a
way to control business cost and mostly used by the top-firms such as producers of consumer
product, steel & its components, tobacco, foodstuff and others. MA is entrusted upon key functions
such as planning, controlling, execution and others. For such managerial activities, administrative
team require financial information about business performance such as sales revenue, cost,
inventory, payables and receivables and others. MA system are of great significance to obtain
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required data set as all the information are kept in a computerized database and using filtration,
customized report can be collected. It helps to keep data safe and away from unauthorized access
and replace manual recording system.
Types of MA system
Considering current times, following are some popular MA system for ThirdWay Interior:
Figure 1 Types of management accounting system
Brief explanation of management accounting systems
Cost accounting system: This system is particularly used in order to determine total cost that
had taken place during the production activities with a clear breakdown structure into material,
labor and overheads.
Job costing system:
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Figure 2 Job order costing
(Source: Lanen, 2016)
It is similar to CAS with an only exception is that this system particularly used to ascertain cost on
a specific job work only. Companies like furniture manufacturers receive order from clients in
advance and then prepare job order costing statement to identify total cost, so that, they can quote
correct price considering profitability targets (Lanen, 2016).
Inventory management system:
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Figure 3 Inventory Management system
(Source: Orendorff, 2017)
Managing inventory at an adequate level is one of the most important business requirements;
however, due to changing market demand, it does not seem easy. However, holding excessive stock
in the warehouse resultant high carrying cost whilst, on the other hand, if company does not stocked
items in accordance with the requirement, then it can lose a significance customer base. This system
helps to track inventory available in the warehouse including opening balance incoming, outgoing,
goods-in-transit and ending balance, so that, order can be place on time to have sufficient stock
level.
Price optimisation: Price fixation is critical task because customers do not want to pay more
whereas company is interested in charging high price to gain maximum yield. Thus, an appropriate
balance requires maintaining in price setting (Simkin, Norman and Rose, 2014). This system aware
firm about how customers buying decisions and preferences will be influenced due to change in
prices performing mathematical calculations.
Use of Management Accounting Systems at ThirdWay Interior
 ThirdWay Interior designs unique, creative and client focused workplace, thus, it will
require calculating their production cost. Hence, such system must be placed in the
manufacturing division, so as to keep electronic records of their manufacturing cost. By its
use, head of the department would be able to identify areas of excessive cost occurrence due
to high wastage or improper usage and devise prudent decisions to cut cost (Eldenburg and
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et.al., 2016).
 Job costing system is useful for both the production and selling department of ThirdWay
Interior. Manufacturing department can use it to compute expenses incurred on acquisition
of material, payment to labor and other overheads whereas sales division use such statement
to set an appropriate charges balancing their own profit targets and client’s requirement.
 RFID (Radio-Frequency-Identification) can be used by the cited firm’s manufacturing
division to automatically track existing inventory volume and signalled managers to place
order to keep sufficient stock level at any time in the business.
 Sales department of ThirdWay Interior must use price optimisation to keep track of users
sensitiveness to prices and set a right price that is acceptable and justifiable for customers so
as to meet out sales and profit targets.
P2 Explaining different methods of management accounting reporting
To: General Manager, ThirdWay Interior
From: Management Accounting Officer
Date: 12th February 2018
Subject: Management a/c reports
Introduction:
Performance management requires thorough and detailed examination of various
management accounting reports including manufacturing, receivables, payable, inventory and
others. This particular section aims to examine different reports that must be evaluated by ThirdWay
Interior managerial team.
Meaning and Importance of MA reports
Reporting to management is a procedure to deliver information at various level of
management so that they will be able to judge the effectiveness of operations of their respective
responsibility centres. It provides a base to make corrective measures, wherever necessary.
Importance
 The most important purpose of Ma is to inform managerial people of ThirdWay Interior
including Chairman, departmental managers, general manager, supervisor, foreman and
others about operational performance.
 In budget, targets are set in advance and after the completion of the period, managers are
require to evaluate that to what extent, targets have been successfully meet out. Thus, reports
are designed in such a manner that assists managers to compare actual and budgeted figures
to discover unfavourable variances and take control measures (Shields, 2015).
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 Report highlights the direction in which business moves and by this way, it provide clear
instructions to the managers about maximizing business profitability.
 It works on principle of management by exception because those activities that are not set in
the budgetary targets are highlighted to the manager.
 It helps to motivate employees so as to attempt required efforts to increase business earnings
to gain maximum yield.
Managerial accounting reports
Figure 4 Types of managerial accounting reports
Budget reports: As name itself, is a quantitative expression of budgeted revenues and
spending set by management. A thorough and detailed examination of change in the budgetary
targets over the period enable ThirdWay Interior’s managers to set an accurate and realistic
budgetary targets for future by projecting future market fluctuations. It also provides a base or
works as a standard for the managers to compare actual results of revenue and monetary spending
and helps in corrective decisions to cut cost, increase savings and income.
Accounts receivables report: People to whom services are rendered on credit instead of cash
basis are called receivables. Such report clearly presents total amount of trade receivables that
remains outstanding or yet to be receive by the firm. In order to manage cash, firm are require to
generate prompt cash from their debtors otherwise it may raise liquidity concerns. This particular
report aware managers about the closing debtors along with the time-duration so that their attention
can be drawn on such parties who exceeded their credit limit and did not make payment to date
(Maas, Schaltegger and Crutzen, 2016). Thus, ThirdWay Interior’s mangers must use it to discover
delinquent debtors and take necessary attempts to get receipts quickly. Moreover, credit collection
department can revise its credit limit and period to manage their sales target, customer base and
cash flow position as well.
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Job cost reports: As discussed earlier, job cost report presents clearly the details of all the
expenditures that company had incurred on particular job work. Such reports enable managers to
find out total profitability and discover areas which are extremely yield worthy or profitable, so
that, they can put attention on the same however, less profit yielding job work can be decides to
either shut down or improve by control measures (Ax and Greve, 2017). Continuous evaluation
helps to take cost control decisions to combat the possibility of exceeding cost above targets.
Inventory and manufacturing report: ThirdWay Interior designs creative, client focused
and innovative office designs for the customers, thus, it uses a variety of items. Inventory reports
presents details about the available inventory balances and helps to find out such items that are
about to finish or below safety stock, so that, manager can fill such requirement timely. Moreover, it
informs key people about cost of material, overhead, wastage on inventory to make prudent cost
control mechanism.
TASK 2
P3 Calculation of costs using appropriate techniques of cost analysis to prepare income statements
Cost analysis concentrates to compute total costs by totalling the expenditures on material,
labour and expenditures. Cost is an important component and requires regular track by the
managers to take necessary actions to control the situation of cost above the target (Eldenburg and
et.al., 2016). Although, fixed costs seem impossible to control or alter in short-term but in long-run,
all the costs tends to vary. However, on the other side, variable costs directly alter with the volume
of production; hence grab manager’s attention for controlling purpose.
Two popular techniques of cost determination are marginal and absorption costing that are
explained here as follows:
Marginal costing: Cost ascertainment under this method is based on segregation of total
costs into fixed & variable. It actually measures the cost of producing an additional unit or item
hence, considers only the variable components such as direct material, labor and variable overheads
and avoids fixed cost occurring elements like rent, insurance and others (Aleem, Khan and Hamad,
2016).
Characteristics of marginal costing:
 It is based on sharp distinction between variable and fixed cost components and design
production & sales policies considering only the total variable cost.
 It measures stock to determine profit at marginal cost rather than total cost. It determines marginal contribution by subtracting total revenue over their total variable
cost.
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Absorption costing: In contrast to above, such method add together all the monetary
expenses regardless their nature whether fixed or variable. The method computes total cost and
subtracts it from the total revenues to discover net profitability results (Narasimhan, 2017). Thus,
unlike marginal cost, it does not differentiate fixed and variable costs by computing total costs.
Marginal versus Absorption costing
1. Marginal/variable cost method attempts to determine product cost, in contrast to this,
absorption cost attempts to allocate manufacturing overheads to various cost centres.
2. The theory of marginal cost takes fixed cost as periodical whilst, on the other side,
absorption cost is a full cost method which considers both the fixed and variable nature of
cost elements equally and an important component of product cost (Narasimhan, 2017).
3. Variable costing method segregates cost considering their nature: fixed/static versus
variable. Unlike this, absorption method classifies costs according to their function such as
production cost, administrative cost, sales & distribution cost and others.
4. Marginal costing method derives contribution and PVR (Profit Volume Ratio) to judge
profitability whilst the same under absorption costing is measured through net profit which
is determined by knowing the difference between total income and total cost.
5. In marginal cost, difference in opening and ending inventory do not affect per unit
computation. On the contrary, it affects stock valuation under absorption costing because it
is valued at total cost (Eldenburg and et.al., 2016).
Calculation of net profit under marginal costing
Particulars Calculations Amount
Income through sales 600 units @ 35/unit 21000
Less:
Inventory at the beginning of the year
Add: manufacturing costs
Material 700 units @6/unit 4200
Labour 700 units @ 5/unit 3500
Variable overheads 700 units @2/unit 1400
Cost of production 9100
Less: Ending inventory balance 100 units @13/unit 1300
Total variable cost 7800
Total contribution (Surplus of sales over total variable
cost) 21000-7800 13200
Less: Total fixed costs (TFC)
Fixed overhead on manufacturing 2000
Admin cost 700
Selling expenses 600
Sales overhead 600
Total fixed cost 3900
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Net profit or loss Contribution - TFC 9300
Working note:
Unit cost
¿ Direct material+ Direct labor +Variable production overhead
¿ £ 6+ £ 5+ £ 2
¿ £ 13
Profit-volume ratio
¿ Contribution/Sales∗100
¿ £ 13,200
£ 21,000∗100
¿ 62.86 %
Calculation of net profits under absorption costing
Particulars Calculations Amount
Income through sales
600 units @
35/unit 21000
Less:
Inventory at the beginning of the year 0
Add: manufacturing costs
Material
700 units
@6/unit 4200
Labour
700 units @
5/unit 3500
Variable overheads
700 units
@2/unit 1400
Fixed production overheads
700 units
@3/unit 2100
Cost of production 11200
Less: Ending inventory balance
100 units
@16/unit 1600
9600
Less: Fixed overhead over-absorbed 100
Costs of goods sold 9500
Gross profit (Surplus of sales over cost of sales) 21000-7800 11500
Less Other overheads
Admin cost 700
Selling expenses 600
Sales overhead 600
Total fixed cost 1900
Net profit or loss (Surplus of gross profit over total non-
production overheads) 11500-1900 9600
Unit cost
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¿ Direct material+ Direct labour +Variable production overhead +¿ productionoverhead
¿ £ 6+£ 5+ £ 2+ £ 3
¿ £ 16
Over-absorption of fixed overheads
¿ Budgeted overheads – actual overheads
¿ £ 2,100−£ 2,000
¿ £ 100
Reconciliation statement
Particulars Amount
Net profitability determined in variable/marginal costing method £9300
Less: Fixed manufacturing expense on the finished ending stock (100 units
@3/unit) £300
Profit determined in absorption/full costing method £9600
Interpretation:
In accordance with the findings, it is seen that unit cost determination under variable costing
method considers material, labour and variable overheads only, totalled to £ 13 whereas absorption
costing technique considered fixed production overheads too and found unit cost worth £ 16.
Contribution under variable method is determined to £ 13,200 greater that amount of gross
profitability in absorption costing which is £11,500 because of segregation of costs into fixed and
variable. PV ratio is found 62.86% which simply presents that firm has gained 62.86% contribution
margin on their total revenue which indicates good surplus left from revenue after deducting TVC.
Ending inventory balance of 100 unit is valued at unit cost of £ 13whilst absorption method valued
stock at £ 16/unit.
TASK 3
P4 Explaining advantages and disadvantages of different types of budgetary planning tools
Budgeting is of vital importance in the budgetary planning and controlling process that
creates a framework for the managers to develop an action plan to anticipate future events,
minimize uncertainly about future and thereby increase the opportunity to achieve set targets. There
are multitudes of methods which might be used by the ThirdWay Interior managerial people to plan
future business events that are demonstrated hereunder:
Responsibility budgeting: As its name, firm’s top managerial people can use it to track all
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the costing elements that can be controlled by the team. Not all the costs elements are under the
control of business entity, therefore, responsibility budget is created that is designed accumulating
only those revenues and expenses that are controllable (Deering and Lang, 2017). For such, duties
can be assigned to the following centres:
Cost centre: This centre owes accountability to track daily monetary expenditures and exert
control to not exceed them beyond set limit in the budget. Thus, it enables ThirdWay Interior’s
managerial team to control or minimizes the chance of unfavourable cost variances by various cost-
cutting measures and continuous monitoring.
Revenue centre: In contrast to this, revenue centre is responsible to put their best efforts to
acquire their targeted revenues base or above. The centre has full authority to make all the necessary
decisions that will contribute towards revenue maximization. Although cost can’t be controlled by
such centre with an only exception relevant to marketing department, it is because; investment on
marketing activities ultimately leads to greater sales volume or vice-versa (Deering and Lang,
2017). The centre has authority to set sales price, recruit sales personnel and put all the efforts that
will boost sales.
Profit centre: The surplus of total revenue over cost is referred to profit. This centre takes
various actions to cut cost and promote sales through negotiation with supplier and labourers, cost-
cutting measures and many others.
Benefits
1. Allocation of responsibility to different cost centres helps to establish sound management.
2. It helps to create better plans and policies including price fixation, cost-control measures,
boost sales and others.
Limitations:
1. It focuses just on controllable cost element and consider fixed cost as static, however, in the
long-run period, such cost elements do not remain constants and affects profitability
(Schick, 2014).
2. The execution of responsibility budgeting method requires sound structure or hierarchy so
that tasks can be delegated properly to different centres.
Standard costing/variance analysis: It is the practice of substituting expected cost and
revenues in the budget and then periodically evaluates variances expressing the difference between
targeted and actual costs (Standard costing, 2016).
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Figure 5 Decision-making under standard costing
(Source: Standard Costing and Variance Analysis, 2016)
The method involves creation of targets and after the completion of budgetary period; it is
compared with the actual outcome to find out deviations whether favourable or adverse to assist in
corrective decision planning.
Advantages:
1. The most important reasons for undertaking standard costing is that it helps to present close
approximation to actual costs (Eldenburg and et.al., 2016).
2. It periodically computes variances and breakdown the same into changes in labor rate,
material cost, usage, workers efficiency, overhead and others, that aware managers towards
areas where cost needs to be controlled.
3. A key application of standard costing is that it assists ThirdWay Interior to analyze the actual
results in subsequent years.
4. If in case, cited firm takes too long time to aggregate actual costs to different cost pools for
inventory measurement, then, such method is found with great significance that helps to
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adjust overhead absorption rate time to time and keep it close to actual cost (Pazarceviren
and Celayir, 2014).
Problems with standard costing:
1. For cost-plus contracts where customer pays for the cost incurred inclusive some profit,
standard costing method not allowed (Rogulenko and et.al., 2016).
2. Many-times, number of variances discovered in standard costing that encourage
management to take incorrect actions to make them favorable. For instance, in order to
mitigate purchase price variance, ThirdWay Interior managers may prefer buying material in
bulk, which may lead to high inventory cost.
3. The method believes that once targets are set, it will not be change while in the fast-paced
environment, none of the cost remains constant and changes fastly thus, standards set by
managers may be outdated within a month or above (Otley, 2016).
4. A complex variance calculation and its reporting takes time, hence, production manager of
ThirdWay Interior who is concerned with getting immediate feedback for instant correction
can’t make decisions promptly.
TASK 4
P5 Comparing various methods of management accounting systems to respond financial problems
With the changing era, there are various advanced tools that is now preferred by
organizations to cope up with the financial crunch or difficulties. Some popular system which may
be useful for ThirdWay Interior are discussed here as under:
Traditional methods used in earlier times New methods in today’s world
Absorption costing method is a traditional
method of cost determination that ascertains
production cost togethering all the cost elements
without knowing their nature whether variable
or fixed.
In today’s period, Activity-based costing (ABC)
method is highly preferred which is justifiable
way as it allocate each activity considering their
respective cost driver to exert strong control
(Mahal and Hossain, 2015). It overcome the
drawbacks of absorption costing by using
relevant cost driver for every cost element and
do not allocate overhead on the basis of machine
and labor hours.
In earlier times, firms examine their financial
performance using ratios which present
statistical relationship between two or more
Unlike, ratio analysis, now-a-days, firms use
KPIs which is helpful to analyse all the
information contained in financial statements
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financial elements (Soltani, Nayebzadeh and
Moeinaddin, 2014). Although, undoubtedly, it
greatly assists managers to make better quality
decisions to strengthen their liquid status, design
a balanced mix of debt and equity and improve
effectiveness but the main drawback with this is
it can be used just for quantitative dataset.
and other qualitative data set as well such as
satisfaction score, efficiency of workers, waiting
time and many others. ThirdWay Interior can set
KPIs in financial perspective of balance
scorecard and examine accounting and non-
accounting information including sales by
segment or region, costs per order and others.
Variance analysis method carries out through
evaluation of actual and planned targets for each
event and helps cost, revenue and profit centres
to make prudent plans. Like, cut-cost of
material, labor and overheads by manufacturing
divisions, sound pricing mechanism by revenue
centre and others.
The method of variance evaluation just
undertake internal comparison, however, now,
tough and stiff competition in the market
requires keeping eye over rivalry’s actions and
policies. Benchmarking is now-a-days preferred
over other methods, wherein, ThirdWay Interior
co. must choose the closest competitor or
industry’s top performer and compare own result
with the competitor performance to carry out
external analysis.
The main benefit with this technique is it
aware company’s expert to know areas where
they lag behind in the competitive age and draw
their attention on work on such problems to gain
competitive benefits over rivalry and make their
own position strong. This method is extremely
helpful to sustain an enterprise in the
competitive corporate world.
In historic times, managers often use
incremental method of budgeting in which
budget creation was too simple as it just require
few alterations in the past period budget in line
with the market changes to cope up with
fluctuations.
The main difficult with the method is managers
do not bring any change in historically designed
system for resource allocation however, as the
In current age of fast-paced environment, it does
not seem a justifiable method of budget
development because in this age, not all the
things remain constant and even changes too
fast. Hence, it requires depth evaluation of
market landscape to set realistic targets that is
expected to closer to actual result, therefore,
Activity-Based Budgeting (ABB) seems
preferable (Activity-based budgeting, 2015).
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need and preferences changes; it must be
change. However, using the same system to
allocate resource to different divisions maintains
sound coordination and avoids conflicts.
ThirdWay Interior must use it to create
budget that allows high level of refinement in
the planning. It mainly focuses on the kind of
activities that had taken place within a reporting
period. Mangers can take assistance of the
method so as to identify the amount of cost
associated with each activity and make quality
decisions regarding resource allocation (Popesko
and Socova, 2016). Manager may decide to shift
funding source to newer opportunities that are
more yield worthy such as new product
development, business expansion in new
geographical area and many others.
CONCLUSION
The carried research brings out the fact that in advanced technological world, ThirdWay
Interior must utilize newer emerged systems to replace manual record-keeping system by automatic
recording. They are cost-efficient as it reduces excessive paperwork and reduces cost of labour and
assure safety aspect of confidential information. Hence, company is advised to use inventory
reporting, price optimisation and cost accounting systems and assists managers in automatic report
generation for performance management. Despite this, marginal costing method is found
appropriate for short-term decisions because in such duration, fixed cost elements are unavoidable
or uncontrollable whilst, in long-term, Activity Based Costing method should be use instead of
absorption costing. Finally, it is identified that in current practical world, ThirdWay Interior must
make use of benchmarking, KPIs and Activity-based budgeting method that gains more preference
in the corporate sector.
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