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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