Detailed Analysis of Management Accounting System and Costing

This report provides a comprehensive overview of management accounting, focusing on its role in organizations, particularly Kingdom Securities Ltd. It defines management accounting and its various types, highlighting its importance in planning, decision-making, and cost management. The report details different methods of management accounting reporting, including budget reports, job cost reports, and inventory reports. Furthermore, it delves into cost analysis, comparing marginal and absorption costing methods through income statements for two quarters. The report also discusses the advantages and disadvantages of planning tools like budgetary control and evaluates techniques used to adopt management accounting systems. The financial statements are prepared for the company to calculate cost using cost analysis techniques such as marginal costing and absorption costing. This analysis enables managers to make informed decisions regarding pricing, production, and overall financial strategies.

Management Accounting
System

Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1.................................................................................................................................................3
P1 Management accounting and its types...................................................................................3
P2 Methods of management accounting reporting......................................................................5
P3 Calculation of cost using cost analysis..................................................................................6
TASK 2.................................................................................................................................................8
P4 Advantages and Disadvantages of Planning tools.................................................................8
P5 Evaluation of techniques use to adopt management accounting system.............................10
CONCLUSION..................................................................................................................................10
REFERENCES...................................................................................................................................11

INTRODUCTION
Management accounting plays a very important role in the organisation. It is that field of
accounting that helps the managers of company in providing useful information which can be used
in planning, decision making, cost management, performance evaluation and many more. This type
of accounting is for internal management i.e. officers and managers. The company referred in task 1
of the report is Kingdom securities Ltd which provide services to every sector whether its is
corporate, manufacturing, public sector, education sector etc. This report will include explanation
about what is management accounting and different types of management acc. , different methods
that will be used for management accounting reporting, calculation of cost using the cost benefit
analysis for making income statement using marginal and absorption cost (A. Hammad, Jusoh and
Ghozali, 2013). It will also include the advantages ad disadvantages of different types of planning
tools used in calculating budgetary control and the techniques that are adopted by organisations to
deal with the financial problems.
TASK 1
P1 Management accounting and its types
Management accounting can be defined as a process of preparing the management accounts
and reports that help I providing accurate and timely statistical and financial data required by the
managers for their daily work and sort term decisions made. Generally, management accounting
generates weekly or monthly reports for the organisation's internal workers such as the managers
and the workers. These reports generally includes the maount5 related to the sales revenue
generated or the cash, accounts payable or receivable, outstanding debts of the company, statistical
data or variance analysis etc. A management accounting system can be defined as s system that
collects financial data from the business operations like change in raw material, change in
inventory, sales data and later on converting these reports into analysis reports for the company.
There are various benefits of using this system of accounting like with the help of timely and
accurate knowledge and information, the company can make useful decisions about the operations
of the company like making marketing budgets, increasing production time, cost cutting and many
more (Agbejule, 2011). Those companies that use management accounting system have advantages
in making more capital for the company that will help them in expansion. The importance of this
system in relation with the organisation are:-
 Critical information provided:- These type of systems are so flexible and efficient in their
work hat they are able to generate approx 300 reports in one go and can even analyse it for
the company. This helps the company to perform the work very fast and eventually the
success rate of the company increases

 Ongoing training and information:- This system is helpful for the management only if the
employees knows how to use it. Employees of organisation must be provided ingoing
training for h system including the upgrades (Albelda, 2011) . The should also be told how
to access the reports and analyse it. The system should contain a operation guide for
themselves so that new employees learn it right from their first day.
 Timely information
 Relevant information.
The different types of Management accounting system which an organisation can use are like cost
accounting system , inventory management system, Job costing system and price optimizing
system.
 Cost accounting system :- This is the type of system that will help company in estimating
the cost of the product by using the profitability analysis approach, valuation of approach
and cost control. Since the accurate cost of control is difficult to estimate therefore the
company uses these method so that they are able to know that which products are profitable
for the company and which are not.
 Inventory management system:- This is one of the most useful management system of
accounting because they are helping the company in getting more orders and increasing the
turnover for the company. It also helps in cost control and ensuring that how much inventory
will be required at minimum cost by the company. There are various tools that are used by
company in valuing the inventory like:-
◦ Economic order quantity
◦ Just in time Approach
They both help company in maintaining he balance between inventory and cost so that business is
able to achieve its long term targets easily.
 Job costing approach:- here the manufacturing cost of the product I being analysed in an
appropriate manner i.e. by dividing it in three categories mainly:-
◦ Direct material
◦ Labour cost
◦ Overhead
The main objective of this approach is to control the operation expenditures os the company and
increase the profitability (Amidu, Effah and Abor, 2011).
 Price optimisation system:- In this the various factors that are responsible for influencing
the price of the product is carefully analysed which mainly includes demand , supply etc. if
the demand of the product is increasing he the company should reduce the prices of the
prices of the products i.e. price and demand have an increase relationship with each other.

P2 Methods of management accounting reporting
Management accounting reports helps the small business owners and the managers in
monitoring the company's performance and are prepared frequently throughout accounting periods
as needed by the company. Depending upon the time sensitivity and type of project, manager or the
owner may even demand reports quarterly, monthly or even daily (Anderson and Sollenberger,
2011). The different methods used by Kingdom securities Ltd in preparing its management
accounting reporting are:-
 Budget report:- These type of reports help the organisation in analysing he comparing the
company's performance and if the business is going good then the department's control
analysis and the cost control analysis is done. The budget estimated is checked that whether
it is based on the previous year's expenses of the company or not. If he budge of the business
in previous years was overly budgeted in previous years then in the present year the budget
which is prepared should be made according to the needs of the company only. Sometimes,
some amount of funds are also give to he employees of the company as bonus for meeting
their specific financial goals.
 Job cost reports:- In these type of reports, actual expenses are shown related to the specific
project f the company. Generally the expenses are matched with the estimated revenue of the
company so that job's profitability is known to the company as well as the employees. This
helps the company in knowing which are the higher earning areas in the company so that
they will focus more on hat area instead of wasting time in some other sector where the
profit margin is relatively low. These reports also analyse the expenses while the project is
in progress so that the managers can do corrections in areas that are costly for the company.
Kingdom securities uses job cost order approach to see the expenses that are allocated in he
project and for tracking the profitability of the company and efficiency related to the cost
control.
 Inventory and Manufacturing Report:- Those companies that are having physical
inventory with them should use managerial accounting reporting system in order to make
their manufacturing process more effective and efficient. These reports includes items such
as labour cost/hour, overhead cost/unit, inventory waste (Burritt, Schaltegger and Zvezdov,
2011). Manager of company then compares these sector within the company to see where
they have scope of improvement and where they are in a position to offer bonuses to those
departments that are performing very nicely.
 Accounts receivable report:- This is a report that is useful in managing the cash flows of
the company that extend credit to the customers. It shows all the customers balances in a
proper order and tell that for how long they have been associated with the organisation.

Most of the reports prepared includes separate columns for invoices that are 30 days late, 60
days late and 90 days late (Cadez and Guilding, 2012). Through theses reports managers can
come to know that where the company is facing problems in its collection process. If the
reports sow that there are sufficient no. of customers who have done default in paying their
balances, then there is need for the company to tighten its credit policies . When the account
receivable report is checked periodically the there are chances that the company will have a
look on its debt balances.
P3 Calculation of cost using cost analysis
Cost can be defined as a value of money which is used in producing something or providing
or delivering a service. There are various types of cost which is being used by the management
accountants while analysing the income statement of the company which are:-
 Marginal Cost:- It is the change in he opportunity cost which arises when the quantity
produced is incremented by one unit. It is basically the cost of producing one mopre unit of
good. At each production level, marginal cost includes all the costs that vary with the level
of production and other costs are considered as fixed by company.
 Absorption cost:- It is that method of management accounting that is used to determine all
the costs hat are used in manufacturing a particular product. Some of the costs that are
directly associated with manufacturing are like wages of labourers , raw materials used for
production. Overheads costs, utility costs. Basically absorption cost includes anything that I
directly associated with the production of the product.
Therefore there are two types of management costing techniques that are adopted by the mangers to
calculate the cost :- Marginal costing method and Absorption costing method. Both the techniques
are different and the results given by them are also different. It depends on the management to
decide which method of cost analysis will they choose to achieve the desired results (DRURY,
2013). For this, the company has to make income statement using the marginal cost and absorption
cost. The statement prepared foe calculating the cost using the techniques of cost analysis are:-
Absorption costing for Quarter 1:
Particulars Amount (in £)
Sales 66000
Less: Cost of sales
Opening inventory 0
production cost (78000*0.85) 66300
Closing stock (12000*0.85) 10200
76500

Gross profit -10500
Less: Fixed & selling expenses 5200
Net profit -15700
Absorption costing for Quarter 2:
Particulars
Sales 74000
Less: Cost of sales
Opening inventory (12000*0.85) 10200
production cost (66000*0.85) 56100
Closing stock (4000*0.85) 3400
69700
Gross profit -4300
Less: Fixed & selling expenses -5200
Net profit -9500
Marginal costing for Quarter 1:
Quarter-1
Particulars Amount (in £)
Sales 66000
Less: Cost of sales
Opening inventory 0
production cost (78000*0.65) 50700
Closing stock (12000*0.85) 10200
60900
Gross profit 5100
Less:
Fixed overhead 16000
Fixed & selling expenses 5200
21200
Net profit -16100
Marginal costing for Quarter 2:

Quarter- 2
Particulars Amount (in £)
Sales 74000
Less: Cost of sales
Opening inventory (12000*0.85) 10200
production cost (66000*0.65) 42900
Closing stock (4000*0.85) 3400
56500
Gross profit 17500
Less:
Fixed overhead 16000
Fixed & selling expenses 5200
21200
Net profit -3700
From this statement it is depicted that the management should take both the methods into
their account so as to take appropriate decisions for the company. In the marginal costing of quarter
2, it is seen that the profit margin of management is not good and therefore it is considered as a
major factor for their weakness. But, in 1st quarter the company has faced losses which means that
they are not having enough conditions for the company (Fullerton, Kennedy and Widener, 2014).
When ever the company is planning to get long term benefits, then they should focus more
on their absorption costing techniques so that the process of achieving the desired target becomes
easy and appropriate precautions should also be taken to avoid any mistakes while conducting the
analysis. The analysis of income statement is very much essential for the company to achieve the
target in an effective manner without any kind of problems or deviations.
TASK 2
P4 Advantages and Disadvantages of Planning tools
Budget can be defined as a summary of income and expenses that are expected to be spent in
a given period of time. Its a tool which helps in prioritising the spendings and managing the money
matters. There are various benefits of preparing a budget like;-
 It helps in controlling the expenses which are expected to happen without any reason.
 It helps in keeping focussed in the money goal means in avoiding unnecessary spendings
that do are not helpful inn attaining the financial goal of the company.

 It makes us aware that what is going on with the money., it clearly defines that fromm where
the money is coming in and where it is going out.
According to the institute of management accounting ,England, Budgetary Control can be defined
as :- “ The establishment of budget related to the responsibilities of executives to the requirement of
the policy and the continuous comparison of actual and budgeted results either to secure by
individual action the objectives of that policy or to provide a firm basis for its revision”. The
benefits that are related with budgetary control in Kingdom securities are like they provide
continuous comparison of the actual performance of the company with the budgeted ones so as to
know the difference, it also includes the remedies taken to in case of any variation in actual and the
budgeted one, also revises the budgets if required (Granlund, 2011). There are various objectives of
budgetary control like:-
 Planning:- Since a budget means a detailed plan of action for a definite period of time.
Through planning, problems are anticipated long before they appear and appropriate
solutions can be provided in given time.
 Coordination:- when the activities are planned earlier only then every one knows how they
have to work and what are the steps they need to take to achieve results.
 Communication:- Proper communication between the members of the company is requires
so that the important information related to the product is communicated to all.
 Motivation:- Budgets help in motivating the employees by rewarding them if they will
follow the activities assigned to them in an appropriate manner.
 Control:- it is necessary for the companies to make sure that budget which is being
prepared for the benefit of the organisation is being followed properly or not (Laudon and
Laudon, 2016).
The various planning tools that are used for budgetary control in an organisation are:-
 Performance budgeting:- It means using the information about the performance and results
in process of budgeting and resource allocation.
 Zero based budgeting:- here the budget is taken as base and the budgets are developed on
the basis of likely activities in the future.
 Responsibility accounting:- it fixes the targets for each respo9nsibikliry centres and the
comparison between the actual and budgeted is also done in this.
The advantages and disadvantages are given below:-
Planning tool Advantages Disadvantages
Performance budgeting It has better management
practices when comparing the
It involves all the alternative
ways where money could be

objectives with the
achievements
spent.
Zero- Based budgeting It focuses ion use of resources
and promotes elimination of
waste (Maskell, Baggaley and
Grasso, 2011).
It is a costly and complex
process without any long term
planning.
Responsibility accounting It helps in improving the
performance if the employees
by assigning them a particular
task which also acts as
motivator factor for them.
It over emphasizes in short term
results and the mistakes done
by the top management might
be avoided in this system.
P5 Evaluation of techniques used to adopt management accounting system
Many times it is seen that the companies are facing financial crises again and again but the
actual reason is not known to them. This is generally happened when the company is not paying due
attention to the important areas like they are holding proper investigation and inspection of their
books of accounts (Parker, 2012). By using proper management accounting techniques the
organisations can try to solve the financial problems that can arise in the organisation. There are
various types of management accounting systems that are used by the companies to sloe the
problems , they are:-
 Traditional cost accounting:- this method is generally used by small and medium sized
enterprises because they are having less financial resources with them. Here, the cost and
profit are measured through prediction. Therefore, it is very helpful to Nero Ltd. to solve the
main problems in an organisation because of which the company is able to move close to
their objectives. This method revolves around three costs only mainly direct cost , direct
labour, overheads.

Source:- Traditional management problems,2017
 Lean Accounting:- It is that accounting technique which is used by the company to bring
the changes which are required by the company in is accounting,measurement, control
processes to support lean thinking and manufacturing (Caglio and Ditillo, 2012). Basically,
Traditional methods of accounting is based on mass production thinking but lean accounting
breaks the rules and are promoting lean thinking. It helps in increasing sales because it is
providing better information for decision making. Lean accounting also helps in identifying
the financial impact of lean improvements by following proper system .
Nero Ltd. Also wants the their business to expand by bringing more funds for the business.
Te company also wants to increase the services of the company and therefore, no. of employees
will also be increased and because of this more investment will be required by the company and
projects will be more costly now. Therefore, budgets needs to be prepared by the company so that
they know that how much more amount of capital is being brought in by the company and how
much more is required. Proper strategies must be created to apply the plans prepared and after
analysing the strategies, each and every problem should be recorded and corrective actions must be
taken (Taipaleenmäki and Ikäheimo, 2013). If the management is interested in starting any new
project then they have to first analyse their previous management reports and then budget must be
made by comparing it with the previous years one so that the funds are allocated correctly.
CONCLUSION
It is concluded from this report that management accounting is a process through which an
organisation can performs various functions of accounting and take correct decisions for the
company and for this various tools and methods are used. Kingdom securities are using
management accounting in their day to operations of the business so that they are able to achieve
Illustration 1: Traditional management problems

their desired results effectively. Therefore they are using different management accounting systems
to perform the activities of the business (.Lee, 2011). The various management accounting systems
that are described in the reports are like cost accounting system , inventory management system ,
job costing and price optimisation. This report also includes the different methods used for
management accounting reporting and the calculation of cost using the cost analysis techniques is
also included.
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