Management Accounting Report: Alpha Ltd. and Planning Tools

This report provides a comprehensive overview of management accounting, focusing on its application within the context of Alpha Ltd., a medium-sized pizza manufacturing company. The report begins by defining management accounting and outlining its essential systems, including cost accounting, inventory management, and price optimization. It then describes various management accounting reporting methods, such as budgetary reports, accounts receivable aging reports, performance reports, and cost management reports, and highlights their benefits. The report further delves into the application of management accounting techniques like marginal and absorption costing, and develops financial income statements. It also assesses different planning tools and their advantages and disadvantages, concluding with a comparative analysis of how management accounting systems can lead to sustainable success, critically evaluating the integration of these tools within the organization to solve financial problems. The report emphasizes the importance of management accounting for internal stakeholders in making informed decisions to enhance profitability and productivity.

Management Accounting
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Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Discussing management accounting and essential requirements of its systems....................3
P2 Describing various methods of management accounting reporting.......................................4
M1 Benefits of management accounting systems and their application......................................4
D1 Critically evaluating integration of management accounting systems and reporting within
organisation..................................................................................................................................4
TASK 2............................................................................................................................................4
P3 Developing financial income statement using marginal and absorption costs.......................4
M2 Applying management accounting techniques......................................................................4
D2 Interpretations........................................................................................................................4
TASK 3............................................................................................................................................4
P4 Explaining advantages and disadvantages of different types of planning tools along with
their use in an organisation..........................................................................................................4
M3 Stating the use and application of different planning tools for preparing and forecasting
budgets.........................................................................................................................................4
P5 Comparative analysis..............................................................................................................4
M4 Critically analysing how the organisations use management accounting systems to lead to
sustainable success.......................................................................................................................4
D3 Critically evaluating the ways by which planning tools for accounting respond
appropriately to solving financial problems to lead organisations to sustainable success..........4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................4
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INTRODUCTION
Management accounting is a concept of analysing the internal financial and non financial
information of an organisation in order to make relevant decisions for the growth and
development of the organisation (Almaktoom, 2017). This concept is an area of study which
facilitate management accountants to analyse the information by which they can enhance
profitability of the organisation (Carlsson-Wall, Kraus and Messner, 2016). The main aim of this
report is to develop understanding about the concepts and systems of management accounting. In
this report, a medium sized organisation is selected which is Alpha Ltd. This is a medium sized
manufacturing organisation which manufacturers local pizza. This organisation has 50 staff
members and annual turnover of £500000.
In this report, the concept of management accounting is explained in detail along with the
description and application of its systems in context of Alpha Ltd. Besides this, various
management accounting reporting methods are evaluated along with its integration with system
within the organisation. Management accounting techniques such as marginal costing, absorption
costing and CVP analysis are used to develop income statements for Alpha Ltd. In the second
part of this report, various budgetary tools are assessed along with their advantages and
disadvantages. In the last, a comparative analysis is used to compare the ways by which
management accounting techniques can be adopted.
TASK 1
P1 Discussing management accounting and essential requirements of its systems
Management accounting is a procedure of presenting the financial information using
management accounting techniques so they can be used by management accountants to make
reliable decisions for an organisation. This accounting concept involves recording to the
transactions of regular course of an organisation. This accounting procedure is collection of
various techniques and methods which require special knowledge and ability which ultimately
aims of enhance profit making ability of an organisation (Chenhall and Moers, 2015). Alpha Ltd.
is a medium scale organisation which manufacturers and then sell local pizza. The operations of
this organisation includes day to day activities due to which it is important for this organisation
to consider appropriate usage of management accounting techniques so that growth and
development of this organisation can be ensured. Apart from financial accounting, it is important
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for Alpha Ltd. to use management accounting as well because of these accounting procedures are
way different from each other.
Financial accounting is used for the purpose to serve external and internal stakeholders but
on the contrary management accounting can only be used by internal stakeholders such as
managers and board of directors. Management accounting is not regulated by any law due to
which skill requirement in the course of preparing management reports is less than financial
reports. Also the management accounting report does not need to be audited which even makes it
more important for Alpha Ltd. as they do not have to bear expense of auditor (Jamil and et.al.,
2015).
Alpha Ltd. is at its developing stage where they must consider using management
accounting systems so that they can effectively utilise their earnings. Management accounting
systems are the basis which assist in managing different variables of an organisation. There are
various types of management accounting systems which are discussed below along with their
essential requirement in context of Alpha Ltd.:
Cost accounting system
This management accounting system is used to estimate the cost which will be incurred
by an organisation. This provides a framework by which an organisation can estimate the cost for
the products manufactured by them which is further used for the purpose of cost control. There
are broadly two types of cost accounting system i.e., process costing and job order costing. In the
case of process costing, an organisation estimates the cost which can be incurred by completing
their whole manufacturing process. On the other hand, job order costing includes estimation of
cost of each job order. In context of Alpha Ltd. both of these cost accounting techniques are used
by which they predict cost expense in their manufacturing process and cost expense of special
pizza orders which they get. These techniques help them to first estimate their incurred cost and
then control that cost by using measures of economies of scale and optimum utilisation of
resources (Jukic and Hedi, 2014).
Inventory management system
In this management accounting system, an organisation develops a framework in which
they record all the transactions of ordering and storing the inventory. This inventory includes raw
material, semi finished goods and even finished goods. The aim behind sing this system is to
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optimally use the available inventory. There are various techniques by which an organisation can
use manage their inventory. These techniques are FIFO, LIFO etc.
FIFO is a technique in which organisations first uses the inventory which is first bought
by them and in case of LIFO, organisation first uses the inventory which is last bought by them
(Kaplan and Atkinson, 2015). Alpha Ltd. is a pizza manufacturing company which develops
their products using raw material which is perishable in nature due to which they must use FIFO
method by which their raw material will be fully utilised and wastage will be minimised. These
are the essential requirements of this system for Alpha Ltd. due to which they must more
emphasise in effectively using management accounting and its systems.
Price optimisation system
This management accounting system is the based on mathematical and economic
equations which helps in analysing the demand for the products at various price levels. The aim
of using this system is to set optimised prices for products which can help in raising the demand
and profitability. In context of Alpha Ltd. which is a pizza manufacturing company must use this
management accounting system which is essentially required by them as by this, they can set
flexible prices for their produced pizzas which will increase the demand and as well
organisation’s profitability.
P2 Describing various methods of management accounting reporting
Management accounting reporting is a process of creating various reports which helps an
organisation to present financial information in an effective way so that profitable decision can
be made. Methods of management accounting reporting includes various reports which are
developed by management accountants to record day to day activities of an organisation. These
management accounting reports or reporting methods are discussed below:
Budgetary report
A budget report is a record of estimated costs which an organisation estimates to plan
their expenses. This report includes prediction of future costs and revenues which can occur
within an organisation. The basic objective behind developing this report is to predict
contingencies which can be seen in future period so that provisions for those contingencies can
be developed and a prevention action plan can be prepared. Alpha Ltd. can prepare this report in
which they can list all future revenues and expenses which expect to be occurred. By this, they
can be prepared for future contingencies which might suffer their operations.
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Account Receivable Aging Report
According to this management accounting reporting method, every organisation must
develop a report which records all the transactions which are done on credit and organisation is
entitle to receive an amount (Karadag, 2015). The main aim behind developing this report is to
keep the track of the values which company is entitled to receive from its creditors. Using this
report, an organisation can also identify the defaulters and make suitable legal actions. Alpha
Ltd. is a medium scale organisation which manufactures and sells pizzas to local public. The
credit transactions of this organisation are comparatively less and this organisation does not
heavily rely upon extending credit. But in order to identify the defaulters, it is important for
Alpha Ltd. to use this reporting method and develop a report which can transact each and every
transaction which is done by providing or extending credit to their customers.
Performance report
It is one of the most influential reports which helps an organisation to improve overall
performance of the employees and the processes of an organisation. In this report, continuous
performance of each and every employee of an organisation is first recorded and then analysed
by comparing it to benchmarks. This report enables to review contribution of each employee
against fulfilment of the organisational objectives. In context of Alpha ltd., human resource
manager can analyse the performance of the employees of this organisation and then
communicate that information with management accountants so that they can record that
information in an understandable form and then continuously review their performance in order
to make sure their full potential to enhance productivity of the organisation.
Cost management report
This management accounting report is one of the most basic report which helps an
organisation to records all the costs which are incurred by them for producing their products. The
main aim of developing this report is to record all the cost transactions so that expense and
spending limit of an organisation can be managed and controlled. Alpha Ltd. can use this report
to analyse their cost expenses which are incurred by them regularly and then at the end of the
month they can compare their cost report which budgetary report to identify the variance.
All the above reports are usually developed by management accountants and are presented
effectively so that management decisions can be made. It is important for organisations like
Alpha Ltd. to develop these reports and present their managerial accounting information in them
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to assist stakeholders such as management and employees. Management and employees are the
internal stakeholders of an organisation which can analyse the true financial position of an
organisation using above mentioned reports and can make effective and suitable decisions so that
they can ensure organisation’s productivity and profitability.
M1 Benefits of management accounting systems and their application
Management
accounting system
Benefits Application in context of Alpha
Ltd.
Cost management
system
This system facilitates in
controlling the cost so that overall
expenses of an organisation can
be reduced and profits can be
increased.
Alpha Ltd. can use this system to
identify the cost incurred by them in
producing each pizza order and then
can analyse the ways by which that
cost expenses can be reduced.
Inventory
management system
This system helps in managing the
inventory from which cost of
those materials reduces and
revenues increases.
Alpha Ltd. can apply FIFO technique
of this system by which they can use
their pizza producing inventories
effectively which will not be
damaged despite of their perishable
nature.
Price optimisation
system
This system is advantageous as an
organisation can set effective
prices of their products which can
increase demand of their products
(Maskell, Baggaley and Grasso,
2017).
Alpha Ltd. can select a reliable
pricing strategy for their products
using this system so that the demand
for their pizzas can even enhanced.
D1 Critically evaluating integration of management accounting systems and reporting within
organisation
Management accounting systems and reports are together integrated within an organisational
process which impacts both in positive and negative way. This can be understood using an
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example of cost accounting system and cost management report in the process of manufacturing
of Alpha Ltd.
Management accountants first use the management accounting system to identify all the cost
incurred by manufacturing unit of Alpha Ltd in producing pizzas for all the orders. After this,
they use management accounting report to record all these costs in a presentable way. By this,
Alpha Ltd. can control their spending level. But by this, much time and money of the
organisation’s employees will be utilised.
TASK 2
P3 Developing financial income statement using marginal and absorption costs
Problem 1:
Variable Costing System
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Absorption costing system
Unit product cost
Absorption Costing Statement calculator
Unit Selling Price 8
Unit Cost (FC+VC) 5
Fixed Manufacturing Expenses 150
Non Manufacturing Expenses 50
Budgeted Activity 75
Income Statements
Period
Apr-
19
May-
19 Jun-19 Jul-19
Aug-
19 Sep-19
[£'000] [£'000] [£'000] [£'000] [£'000] [£'000]
Sales 600 480 720 600 560 640
Opening inventory 0 0 75 0 0 75
Add: Variable Cost [Production] 375 375 375 375 425 350
Less: Closing Inventory 0 75 0 0 75 25
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Marginal Cost of Sales 375 300 450 375 350 400
Gross Profit 225 180 270 225 210 240
Adjustment for Overheads 0 0 0 0 -20 10
Less: Non Manufacturing Cost 50 50 50 50 50 50
Net Profits 175 130 220 175 180 180
Working notes
Period
Apr-
19
May-
19 Jun-19 Jul-19
Aug-
19 Sep-19
[£'000] [£'000] [£'000] [£'000] [£'000] [£'000]
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening inventory 0 0 15 0 0 15
Closing inventory 0 15 0 0 15 5
Schedule of reconciliation
Period Apr-19 May-19
Jun-
19 Jul-19
Aug-
19 Sep-19
[£'000 ] [£'000 ]
[£'00
0 ]
[£'00
0 ]
[£'00
0 ]
[£'000
]
Net Profits under Absorption Costing 175 130 220 175 180 180
ADD : Fixed Overheads in opening 0 0 30 0 0 30
LESS: Fixed Overheads in closing 0 30 0 0 30 10
Net Profits under Marginal Costing 175 100 250 175 150 200
M2 Applying management accounting techniques
Problem 2:
a) Before installation of the new machine
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d. Recommendations
By considering above cost volume analysis, it is recommended to the organisation that
they must install the new machinery as the company will earn high sales revenue. From the
above analysis, it can be seen that after installation of machinery, this company is receiving high
benefit with same cost and volume.
D2 Interpretations
Income statements for Alpha Ltd. is prepared using management accounting techniques of
marginal costing and absorption costing. With marginal costing, it has been analysed that Alpha
Ltd. is capable of introducing new pizza formula as they will earn 200000 pounds at the end of
the period. On the contrary, this organisation will earn 180000 pounds at the end of the period.
The difference between the profit of marginal and absorption technique is due to non absorption
of fixed expenses in the vase of marginal costing due to which net profit in this case is higher.
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TASK 3
P4 Explaining advantages and disadvantages of different types of planning tools along with their
use in an organisation
Planning tools are the methods which helps an organisation to predict their future in such a
way that it can facilitate to forecast future contingency so that relevant provisions for them can
be prepared (Mishan, 2015). These planning tools are used by an organisation in order to forecast
future issues, so that management accounting systems can be prepared so that those financial
issues can be well controlled. Few planning tools along with their advantages and disadvantages
in context of Alpha Ltd. are analysed below:
Zero based budgeting
This planning tool is a budget which prepared every year from the zero base. This budget
is developed with a zero base regardless with the amount which last period’s budget. Alpha Ltd.
can use this budget which can help the managers of this organisation to look over every single
penny which they have spent in the current year so that they can justify all the operating
expenses. This planning tool also helps in considering the future economic shocks like recession
(benefit).
This budget also has few disadvantages which can restrict Alpha Ltd. to use this planning
tool. Zero base budget requires high skilled for which; this company has to hire new
management accountant which will ultimately result in cost increment. Also, zero base budget
can easily be manipulated by the managers (Tamandeh, 2016).
Production budget
This budget is a financial planning tool which helps in predicting future production units
and costs which will be incurred producing those products (Mohamed, Kerosi and Tirimba,
2016). This tool includes estimated production capacity and demand for those products. Alpha
Ltd. can use this budget to first analyse the demand for their products in market and then develop
a production budget which they can include their estimate number of products which are can be
produced by them and the cost will be incurred in this course. Benefit of this planning tool is that
it can help organisations like Alpha Ltd. to ensure maximum utilisation of their inventories and
material, labour, overhead can be monitored at once. This tool also has few disadvantages
which includes usage of plenty time and money.
Cash flow budget
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Cash flow budget is a planning tool which helps in forecasting the future cash inflows
and outflows. The aim behind developing this type of budget is to ensure whether or not
organisation will have enough liquid funds to pay off their future debts. This budget can facilitate
Alpha Ltd. by its benefits which are identification of potential deficits and ensuring liquidity.
This planning tool also has few disadvantages which restricts Alpha Ltd. to use this
planning tool. An organisation can face issue of restrictive spending limit and ability to build a
credit profile due to developing cash flow budget.
The above mentioned planning tools can help an organisation such as Alpha Ltd. to plan
for their future and predict issues which can be faced by them in future. All these planning tools
can even result in resolving the financial issues by developing contingency plans.
M3 Stating the use and application of different planning tools for preparing and forecasting
budgets
Planning tools such as operational budget, cash flow budget and zero based budget can be
used by an organisation such as Alpha Ltd. to forecast their future revenues and expenses and
then record them in a forecasting budget by which they can predict contingencies and develop
preventive measures so that they can lead growth and development. For instance, Alpha Ltd. can
use cash flow budget to determine their future cash availability and then record them in a
forecasting budget so that relevant cash can be ensured in the company.
P5 Comparative analysis
In order to execute organisational functioning in well defined manner entities are required to
have sufficient amount of funds. As if company cannot able to allocate proper funds for their
operational activities then they may find themselves into financial issues and problems. It has
been ascertained that Alpha Ltd is facing issues related to finance which is being further
discussed below:
Errors in accounting records: It has been identified that if accounting reports that are duly
get generated on yearly basis have issues and errors then it will lead towards improper
information related to funding (Otley, 2016). In context with Alpha Ltd, it has been ascertained
that company is also going through this issue as accountants of organisation are not able to
develop accounting records accordingly.
Inadequate protection of assets: If assets that has been acquired by organisation as to
execute functioning are not properly protected in an appropriate manner then this may further
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lead towards lack of funds for organisation. Alfa Ltd, currently deals with the issue of inadequate
protection of assets and it further affect their operations.
As to effectively execute organisation functions in well defined manner manager of entity
are required to ascertain and overcome financial issues. In order to undertake process of
identification entity take advantage of techniques that are being defined below:
KPI (Key performance Indicators):
With the help of this performance management tool organisation can effectively able to
determine the steps that are being undertaken by entity as to conduct operations in order to fulfil
predetermined standards. This tool aid Alpha Ltd to make effective identification of issues
related to inadequate protection of assets. Thus, KPI allows manager to have effectively
evaluation of problems and formulate well defined solutions accordingly (Tschopp and Huefner,
2015).
Benchmarking:
In this policies of organisation get compared with other entities in order to identify errors
within management system. This technique will aid organisation accounting professionals as to
determine mistakes that has been made by them during the time of recording information related
to finance. With the help of this managers of Alpha Ltd can identify errors in their accounting
system as further undertake comparison with other entities in same sector.
As to effectively deal with all issues Alpha Ltd managers undertake use of financial
governance:
Financial governance:
This process involve recording, monitoring and collection of financial information as per
according to accounting principles (Williams and Dobelman, 2018). This will allow organisation
to effectively track down all financial transactions in order to manage and control resources
exploitation. In Alpha. Ltd. Managers undertake use of this as to challenge financial issue related
to non protected assets and accounting records.
Comparison of companies:
Basis Alpha Ltd Chicago Town
Cost accounting system Organisation manager
undertake use of this system as
to effectively identify
Management is taking use of
cost accounting system as to
effectively deal with financial
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problems and deal with errors
that pertains in accounting
records by considering cost
that include different
transactions that are being
made by entity.
issues related to unforeseen
expenses as it allows them to
ascertain fund that are required
by them in future and further
allocate the sources to collect
adequate funds.
Inventory management system Inventory management system
has been undertaken by
organisation as to effectively
manage inventory as if entity
manage stock in well defined
manner them assets can be
duly protected for any kind of
exploitation.
Organisation management use
this system as to challenge the
problem related to lack of
inventory for future operations.
It will allow them to have
minimum level of stock within
their warehouse as to further
conduct operations smoothly.
M4 Critically analysing how the organisations use management accounting systems to lead to
sustainable success
Systems of management accounting such as inventory management system and cash
accounting system along with management accounting technique of KPI and benchmarking
benefits an organisation to predict future financial issues and then rectify then using provisions
will lead them towards sustainable success (Ye, Yang and Tan, 2015). These systems and
techniques require high skills to be executed, organisations which does not have enough financial
resources to hire skilled personnel has to negatively impacted by this procedure.
D3 Critically evaluating the ways by which planning tools for accounting respond appropriately
to solving financial problems to lead organisations to sustainable success.
Budgetary planning tools such as operational budget, cash flow budget and zero based
budgeting helps organisation to forecast issues which can be faced by the management of the
organisation in future. These predicted issues are then resolved by the organisation using
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techniques of financial governance and KPI. This way planning tools indirectly helps in solving
financial issues which leads company towards sustainable success.
CONCLUSION
At the end, it can be concluded that there are various types of management accounting
system and companies use them for increasing their overall efficiency. It allows them to reduce
confusions and synchronize different tasks of the organization. reporting methods are used for
checking the work done by teams, variety of reports help firm in making future plans by
depicting positives and negatives. Marginal costing always shows higher profit compared to
absorption as it does not absorb fixed cost. Zero based budgeting, cash flowing budgeting
operational budgeting are effective planning tools, they play crucial role in construction of
medium and short term plan. Every organization face many problems but accounting systems
support them in resolving financial problems. Company can respond to a problem by adopting
suitable accounting system.
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