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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