TSR Pvt. Ltd. Case Study: Management Accounting and Planning Tools

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UNIT 5 – MANAGEMENT ACCOUNTING L-4
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Executive summary
Management accounting is an essential part of an organisation as it assists in managing the
business activities effectively. The study has analysed different types of management
accounting systems and techniques that helps management in decisions making process. The
study has also shed light on planning tools and its usage to help achieve an organisation
sustainable success. Use of marginal costing and absorption costing has been done to
determine the cost per unit. Moreover the study has also provided income statements under
both marginal and absorption costing for TSR Pvt ltd. In addition to this advantages and
disadvantages of planning tools have also been discussed.
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Table of Contents
Introduction................................................................................................................................3
LO1 Demonstration of management accounting.......................................................................4
P1 Management accounting and its essential requirements...................................................4
P2 Various methods used under management accounting report...........................................5
M1 Benefits and application of management accounting system..........................................7
D1 Evaluation of integration of management accounting system..........................................7
LO2 Calculation of per unit cost and income statement under marginal and absorption costing
....................................................................................................................................................9
P3 Calculation of per unit costs and income statement..........................................................9
M2 Application of management accounting techniques and production of financial
reporting documents.............................................................................................................11
D2 Financial reports for business activities..........................................................................12
LO3 Explanation on use of planning tools...............................................................................13
P4 Advantages and disadvantages of planning tools under budgetary control....................13
M3 Use of different planning tools and its application........................................................15
LO4 Comparison of ways in which organization use management accounting......................15
P5 Comparison on adaptation of management accounting system......................................15
M4 Analysis of response to financial problems...................................................................16
D3 Evaluation of planning tools can lead organization to sustainable success....................17
Conclusion................................................................................................................................17
Reference List..........................................................................................................................18
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Introduction
Management accounting is a process that provides accurate financial information of a
business organization by using their internal and external data and also by planning or
decision-making. TSR pvt.ltd is a manufacturing company that produces radiators, fans and
packaging boxes. This study focuses on management accounting system that is followed by
TSR pvt.ltd and their essential requirements to compete for business with rivals in market. It
also focuses on different types of planning tools that are used for budgetary control by TSR
pvt.ltd. Various advantages and disadvantages of planning tools are shown and also it focuses
on how organization leads in response to financial problem lead their organization to
sustainable success.
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LO1 Demonstration of management accounting
P1 Management accounting and its essential requirements
Concept of Management accounting used in a business organization is to identify, record, and
present financial information to the organization such that managers can know companies
basic requirements and profit revenue in market. As opined by Ammar et al. (2017:230), it
helps them to know internal management issues and make a decision to increase profit
revenue of the organization. TSR pvt.ltd uses management accounting as it shows how
company is spending resources and their basic requirements to run the organization smoothly.
There is a different essential requirement in management accounting to run business
organization that follows:
1. Cost accounting
Cost accounting helps TSR pvt.ltd to know approximate cost of its product, profitability in
organization and also cost control. It helps organization to control business cost and give
them idea whether prices of their product in market should be increased or decreased
according to demand. This process will individually record cost, measure them and also
compare inputs, outputs of the organization such that it will assist in measuring financial
performance of company.
2. Fund Flow analysis
TSR pvt.ltd uses fund flow analysis process in their organization to find out whether funds in
their organization are being properly used from one period to another period. It helps industry
to find out movement of fund and also tends to know actual revenue in their organization.
This method helps them to run their business smoothly in market.
3. Inventory Management
Inventory management plays a big role in TSR pvt.ltd as it helps them to oversee storage of
components and also their ordering and use in the corporation. As said by Ax & Greve
(2017:59), this system helps the organization by using of application that are scanners,
desktop software to check inventory management such as stocks, consumable goods, and
supplies in their organization and also it helps to control excess of production in organization.
4. Optimization of Price
TSR pvt.ltd uses this technique to optimize their prices in market according to customer
demand. As said by Hopper & Bui (2016:10), with mathematical application it determines
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how customer will react on various prices of their product and services. This technique is
used to fulfil company goals and maximize profit in market.
Figure 1: Explanation of management accounting and essential requirements of
management accounting system
(Source: Created by learner)
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CostaccountingFundFlowanalysisInventoryManagementOptimizationofPrice

P2 Various methods used under management accounting report
TSR pvt.ltd uses various methods in their organization for management accounting report
such as:
1. Budget
This is one of the key elements in management accounting used by TSR pvt.ltd for preparing
budgets. Taking of previous fiscal year data organization makes budget for their company
such that in future there shall be no production and financial issues. It also helps them in
getting idea of cost consciousness such that organization restricts extra expenditure from their
organization that can help them to increase profit revenue in market.
2. Cost Reports
Cost report helps TSR pvt.ltd to calculate cost of items manufactured in their organization. It
is done by taking raw product, overhead costs and extra cost incurred in organization. As
mentioned by Lopez-Valeiras et al. (2015:3479), all data are summarized to get cost report
that helps industry to know their actual profit in current year. This report permits managers of
the organization to view whether prices of product will be constant or changes shall be made
to increase profit margins.
3. Performance Report
TSR pvt.ltd uses this method to check performance of managers and different departments of
their organization. It helps them to evaluate whether managers and employees of their
organization are focused on their work and know basic knowledge of work. As opined by
Lueg & Radlach (2016:158), the report assists managers in planning new idea and takes
necessary steps to provide employees with basic knowledge and helps to increase their
performance. This report thus helps incorporation to know future demand in production and
estimation of increasing revenue in coming period.
4. Management Reporting
This report helps TSR pvt.ltd to show profit and loss account and also balance sheet of the
company which clearly depicts strength and weakness of industry and its financial activities.
This method helps managers of organization to make company decision according to
provided data and steps that are followed to increase organizations revenue.
5. Variance Analysis
TSR pvt.ltd uses this method to find out difference between planned and actual behaviour. It
is used to maintain control over their organization. This analysis helps company to spot issue,
threats to business, short-term and long-term business.
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Figure 2: Explanation of different methods used for management accounting report
(Source: Created by Learner)
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BudgetCostReportsPerformanceReportManagementReportingVarianceAnalysis

M1 Benefits and application of management accounting system
Cost accounting system benefits TSR pvt.ltd to control cost of its product and prices in
market. This helps them to maintain profit revenue as according to demand of product
organization increases or decreases price of product. However, fund flow analysis helps TSR
pvt.ltd to understand fund generating a capacity of their firm that ultimately provides
movement of fund in their organization and whether funds are being properly used in
organization and also helps to know company's liquidity position. This process earns high
respect among shareholders to increase creditworthiness among creditors and build a good
reputation for the organization. As said by Millo et al. (2016:17), on the other hand, inventory
management helps them to know inventory stock by using new technology like scanner and
software that provides exact quantity of stock present in company’s inventory. It helps them
to see their ordering and use in firm. However, firm also gets benefited by using optimization
of price that helps their organization to know how sensitive their clients are in changing of
product prices and business can obtain profitability in market. They analyze various buying
pattern of customers and also their preferences such that according to those analysed prices of
product are placed. This lowers demand risk of products in market and helps to improve
revenue of organization.
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D1 Evaluation of integration of management accounting system
In management accounting system cost accounting plays a major role in TSR pvt.ltd that
control their business cost and provides idea to increase or decrease their prices on product.
On another side, fund flow analysis provides information about funds movement in
organization and whether funds are properly used by company. As mentioned by Otley
(2016:45), inventory management helps to provide information on available stocks in
organization and production process keeps on going smoothly.
However, budget helps TSR Pvt Ltd to get an idea of future pricing on products and also
tends in cost consciousness so that company restricts extra expenditure. On another side, it
also uses a cost report to calculate cost of items and summarizes total profit in current fiscal
year. As said by Quattrone (2016:118), company also uses performance report to analyze
performance of employees and managers in their organization and necessary takes necessary
steps to improve their performance by providing basic knowledge. Reporting on management
helps them to get balance sheet and profit and loss account of business and lastly, variance
analysis helps TSR pvt.ltd to spot out company issues, market threats in short and long-term
business.
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LO2 Calculation of per unit cost and income statement under marginal and
absorption costing
P3 Calculation of per unit costs and income statement
Marginal costing: Under this method of costing, fixed costs are considered in full and are
deducted from the total of contribution margin. Contribution margin is the amount of profit
that is calculated by deducting total cost of sales from that of revenue. Cost of sales on the
other hand only takes into account direct overheads and variable overheads (Nasseri et al.
2016:75). It is assumed under marginal costing method that fixed cost does not change with
change in production level or units these are fixed and hence allocating it as per units would
result in inappropriate results.
Absorption costing: Absorption costing includes fixed expenses as a part of cost of
production and hence it absorbs fixed cost also on a unit cost basis. In regards to this gross
profit margin is calculated after deducting cost of production from that of sales instead of
contribution margin. Under this per unit cost appears to be high and therefore absorption
costing depicts high expenses (Francioli & Quagli, 2016:165).
Calculation of per unit cost:
Figure 3: Calculation of per unit cost
(Source: learner)
Calculation of per unit cost has been done under both absorption costing and marginal
costing. It has been seen that TSR ltd produces a total of 100 units. It incurs expenditures
related to direct material, labour and overheads. It has been observed that total direct material
expenses are £50000 and direct labour amounts to a total of £30000. On the other hand
variable overhead amounts to £20000. In case of absorption costing additional expenses that
is fixed overhead is also allocated on per unit cost basis (Otley, 2016:45). Therefore it has
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been also considered. However in case of marginal costing technique fixed manufacturing
overhead amounting to £40000 has not been taken into account. Hence per unit cost has been
found out to be £14 per unit under absorption costing and £10 per unit under marginal
costing. It has also been observed that, marginal per unit cost is lower than that of absorption
costing.
Income statements under marginal costing and absorption costing:
Figure 4: Income statement for TSR Pvt ltd under Absorption costing
(Source: learner)
Income statement under absorption costing has been prepared and it has appeared to be
having a net profit of £50000. 10000 units have been considered in relation to absorption
costing and thus the gross profit margin has been calculated to be £150000. Cost of
production has arrived at £100000 and operating expenses have come at a total of £100000
also. In case of absorption costing, all manufacturing related overheads and expenses have
been considered to be a part of cost of production (Lopez-Valeiras et al. 2015:3479).
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