Management Accounting: Costing and Budgeting Analysis

This report provides a comprehensive analysis of management accounting principles, focusing on costing methods, budgetary planning, and financial problem-solving. It begins by defining management accounting and its key requirements, contrasting it with financial accounting, and highlighting essential management accounting systems such as cost accounting, inventory management, job costing, and price optimization. The report then explores various management accounting reporting methods, including receivable reports, job cost reports, budgetary reports, inventory management reports, and manufacturing reports. The core of the report delves into cost measurement techniques, comparing and contrasting absorption and marginal costing methods, with detailed unit cost calculations and profitability analysis for Unicorn Ltd. Finally, the report addresses the advantages and limitations of budgetary planning tools and underscores the significance of managerial accounting systems in combating financial problems, offering insights into how businesses can leverage these tools for effective decision-making and financial stability. The report emphasizes the practical application of these concepts for a small UK retailer.

Management accounting

Table of Contents
INTRODUCTION................................................................................................................................1
TASK 1.................................................................................................................................................1
P1 Management Accounting and key requirements.........................................................................1
P2 Methods for management accounting reporting..........................................................................4
TASK 2.................................................................................................................................................5
P3 Computation of cost measurements in accordance with absorption and marginal costing.........5
TASK 3.................................................................................................................................................8
P4 Advantages and limitation of budgetary planning tools..............................................................8
TASK 4...............................................................................................................................................11
P5 Significance of managerial accounting systems to combat financial problems........................11
CONCLUSION..................................................................................................................................13
REFERENCES...................................................................................................................................15
Table of Figures
Figure 1 Financial and management accounting..................................................................................2
Figure 2 Key performance indicators.................................................................................................12

INTRODUCTION
With the changing and volatile market factors at international competitive world, companies
are require to keep their eye on regular activities and functions to better inform themselves and
make informed decisions. Making good quality decisions and strategic plans aligning with
organizational goals helps in improving competitive position. The proposed investigation here lay
emphasizes upon examining the importance of different managerial accounting systems and
analysing their contribution towards business decisions. Although managerial accounting includes
both quantitative and qualitative assessment, still, there are some key factors on which managers are
strongly focuses such as cost, inventory and others. Although, in previous times, there are few cost
measurements techniques like absorption, however, with the change in period, new cost
measurement methods came into force. Thus, the paper will clearly presents cost calculation for a
small sized UK retailer, Unicorn Ltd under both the absorption and full costing method. Finally, it
will discuss several important tools that establishments can use to make successfully combat their
financial turbulence and problems.
TASK 1
P1 Management Accounting and key requirements
Managerial accounting (MA) is a system which is about using accounting information of the
enterprise to better inform top-managers of the firm to aids in strong management and put control
functions. The concept came first in 19th Century after internationalization when enterprises focuses
expanding their business on international market to maximize their scale of operations and derive
benefits of economies of scale. In simple words, MA can be defined as a provisions of giving
financial as well as non-financial information to the managers for competitive plans and decisions.
IMA (Institute of Management Accountant) defined it as a profession which includes planning,
decisions, performance management system, expertise in annual account reporting and rationale
controlling plans to facilitate firm in quality decisions.
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Figure 1 Financial and management accounting
(Source: Malmi, 2016)
The illustration clearly presents that the scope of management accounting is too wide
compare to financial management that only covers cost accounting, evaluation of performance,
planning & decisions. Unlike this, MA practice extended to three key areas including strategic
management, performance management and risk management. It differs from the financial
accounting in several important ways presented below:
 Shareholders, public regulators, creditors and others make use of publicly published
financial accounts while only the business top managers inside the enterprise uses
confidential management accounting reports.
 Financial accounting gives historical information, MA is forward looking that is extremely
concerned about future results and rationale strategies and plans are designed with the key
target to perform better in future (Maynard, 2017).
 FA is case-based, in contrast, MA is a model-based system with some degree of abstraction
to facilitate generic decisions.
 Accounts of the Unicorn Ltd are prepared with reference to general financial accounting and
reporting standards, MA information is presented with references to managers’ requirements
with often use of managerial information systems.
 Accounts are generally prepared on a timely basis, managers prepare reports anytime
whenever they need.
 FA focuses on the entire company as a whole, MA gives disaggregated information about
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company’s products, divisions, operations and activities (Arnold and Artz, 2015).
Systems of management accounting
Cost Accounting system: Now-a-days, manufacturing companies use it to capture their total
costs of manufacturing by detailed assessment of all the input costs at every stage of production.
Initially, the method track such costs individually, and afterwards compare the results to output to
aid in decisive actions to measure and improve the financial results. It typically includes five key
elements that are input measurement, stock valuation, accumulating costs, cash flow analysing and
recording flow of inventory.
Unicorn Ltd can use it to know that to what extent, actual manufacturing costs were under
the limit of budgeted costs. If actual costs exceeds target then, it alert managers about financial
difficulties and aids in qualitative cost control decisions.
Inventory management system:Tracking level of inventory is important not only for the
manufacturers but also equally important for the trading firms engage in buying and selling variety
of goods. The software track order, deliveries and sales to present the outstanding stock balance at
the ending of accounting year. However, manufacturers use it to create work orders, bills and other
documents subject to production activities. Unicorn Ltd must use such system to avoid overstocking
and outage problem. Currently, Enterprise Resource Planning is used by enterprise to record the
inflow and outflow and know the net stock by entering the data. However, these systems run
automatically as per barcode & RFID (Radio Frequency Identification) and does not require
entering data. Thus, it helps in saving staffing costs and assign people to other tasks which improve
productivity (Management accounting system, 2017).
Job costing system: When some unit of products are produced together in a single slot,
called job, these system can be used to determine total job costs. Thus, it is of crucial significance
for the Unicorn Ltd to track how much costs have been incurred till the percentage of work
completion and match it against standard to respond timely to keep costs under control.
Price optimization: The method is used for performing sensitivity analysis which determines
future demand at different selling prices charged for deliveries of Unicorn Ltd. In the field of
economics, consumers often prefer less demand when prices are too high, and demand higher
quantity at less charges. With the help of these software, company can know sensitivity of sales
volume that how it will be affect with the rise or decline in chargeable rates. It is especially used by
selling divisions to set an accurate charge which manage sales volume at right level without
affecting sales quantity.
Essential requirements
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 It is necessary for all the systems or software to deliver them highly relevant and accurate
information to the Unicorn Ltd.
 All the system needs to be updated timely to provide the best quality set of information to
the organization.
 It is necessary for the enterprise to provide customized reports according to the requirements
of business managers.
 All the system secure data with high level of security and confidentiality.
P2 Methods for management accounting reporting
As discussed earlier, managers use different type of records as a key source of quantitative
information and its thorough and deeply examination applying managers’ skills and knowledge
helps in decisive actions and strategic formulation. The most frequently used reports by the business
managers are summarized as follows:
Receivable reports: Unicorn Ltd merchandise their goods and other services either on
prompt basis which generates cash quickly or on credit by allowing final user to pay money after
some time. It facilitate users to pay later while companies receive benefit through higher sales
volume and consumer base. However, many-time, it is possible that customer did not make timely
payment of their credit, it can bring significant financial or liquidity trouble for the business
(Kaplan and Atkinson, 2015). Receivable reports provide clear set of information about total credit
sale, outstanding payments that still need to be received. It alert managers about several customers
who remains overdue for a longer period and reminded by the company for many time, still, they
did not make payment. Such reports helps credit collection departments to take immediate strong
action against customer who has been delayed in payment for a long period and also helps in
decisive credit decisions.
Job cost reports:Job costing system is of crucial importance for preparing such reports that
provides clearly the details about costs of all the inputs including material, contribution paid to
labourers for their efforts and other expenses. Continue evaluation and comparison with the targets
helps Unicorn Ltd in putting control measures to reduce the possibility of overspending. Sound cost
control mechanism helps in correct price fixation by charging appropriate margin percentage
considering customers’ ability or willingness to pay and profitability targets of the enterprise.
Budgetary reports:In business, budget is designed to set challenges for every worker or staff
members which company expects them to achieve by putting wonderful and genuine efforts.
Unicorn Ltd operates through purchase, sales, marketing, production and other divisions. Setting
targets aware and alert all the department managers to create necessary divisional plans and policies
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to make sure that every member perform excellent and achieve the results successfully. It includes
collection of resources, its proper allocation, workers monitoring and necessary control that will be
retained to accomplish the targets successfully.
Inventory management reports:Inventory management systems which run on barcode
scanning system and RFID system provides customized stock reports presenting the details about
opening stock, inflow and outflow of goods during the year and closing inventory level as well
(Cooper, Ezzamel and Qu, 2017). Managers can use it to retain their stock at a right level without
any possibility of outage or over-stocking that unnecessarily leads to increase holding and ordering
costs.
Manufacturing reports: As name itself, it gives details about expenditures paid on material
acquisition, consideration in the form of wages to labor every hour and other production or non-
production overheads. It will enable organization to make decisive actions and strategies
comprising inventory control, warehousing and various preventive measures to combat the risk of
obsolescence (Van der Stede, 2011). Using such reports and matching the targets with actual
outcome, managers can also find out the reasons behind high cost occurrence whether they make
poor projections or volatile market resultant adverse variances like high price charged for material,
high demand of per hour wages by people, excessive usage of material and any other reasons. Thus,
with the help of it, manufacturing team would be able to come up with right strategy and to control
costs under the restricted standard limit.
TASK 2
P3 Computation of cost measurements in accordance with absorption and marginal costing
In earlier times, firms allocate or assign their overheads using overhead absorption rates
(OAR) taking direct material usage or direct labor hours as a basis. However, now-a-days, new
techniques have been emerged such as activity-based budgeting wherein cost of each and every
component is allocated as per their cost element or driver. However, due to its complexity and
expertise requirements, many companies in today’s time uses still absorption and marginal costing
that are explained below:
Marginal costing: The method differentiate two kind of cost behaviour that are fixed and
variable. Former does not fluctuate or vary according to outcome, variable directly changes with the
level of production as it rises or declines with the increase or decrease in total production
(Narasimhan, 2017). Applying the method, Unicorn Ltd need to subtract their total variable costs
against turnover to represent contribution. However, total fixed costs is charged against contribution
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to determine net profit.
Absorption costing: This method do not differentiate fixed and variable costs and charge
total costs against total sales to find out net profit (Jager and et.al., 2014). However, the main
downfall side of the method is that it does not use an appropriate cost allocation basis and produce
misleading financial results which may result in poor quality decisions.
Unit cost calculation
Marginal costing (GBP) Full costing (GBP)
Material cost 6 6
Wages paid 5 5
Production overheads
Fixed/Static 2 2
Variable overheads (GBP2100/700 units ) 3
Total costs 13 16
Calculation of profitability
Particulars Amount Amount
Sales for the year (600*@ 35/item)
Less: Cost of goods sold
Inventory available at the beginning of the period
Costs of goods manufacturing (700 @13/item)
Inventory at the ending of the year (100U@13)
Cost of goods sold/cost of sales
Variable sales overheads (600*1)
Total variable costs
Total contribution for the current year
Less: Fixed costs
Fixed manufacturing cost
Administration cost
Fixed selling costs
Total fixed costs incurred in production
Net Profit of the company for current year
0
9,100
(1,300)
(7,800)
(600)
2000
700
600
21000
(8,400)
12,600
(3,300)
9,300
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Particulars Amount Amount
Sales for the current year (600*@ 35/item )
Less
Inventory balance at the beginning of the year
Cost of production (700 @GBP16/item)
Inventory balance at the ending of the year
(100@GBP16/item)
Cost of sales/cost of goods sale
Less: over-absorbed fixed production overheads
Costs of goods sold/cost of sales
Gross profit
Less: Fixed costs
Administration cost
Sales overheads
Selling costs
Total fixed costs paid during the year
Net Profit received in the year
0
11,200
(1,600)
700
600
600
21000
(9,600)
100
9,500
11,500
(1,900)
9,600
Over-absorbed fixed overheads:
Actual fixed overheads: 2,000
Budgeted overheads: 2,100
Over-absorbed: 2,000 -2,100
= 100
Reconciliation statement
Particulars
Amoun
t
Profitability under absorption method 9,600
Less: fixed manufacturing overheads on the inventory at the end of the year
(100U*GBP3) 300
Profit under marginal costing method 9,300
The results of both the above costing method determines different unit cost with GBP 13 as
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per variable costing method while the same in absorption method is GBP 16 as it also incorporated
fixed costs of manufacturing. The income statement determines net profit of £9,600 in full costing
method and the same in marginal method is £9,300 with total contribution of £12,600.
TASK 3
P4 Advantages and limitation of budgetary planning tools
Budget is a financial statements that presents projected sales and various costs elements of the
enterprise. It set challenges for all the workers of Unicorn Ltd and everyone work for putting their
genuine efforts and the best contribution in order to meet out targets. Company’s departmental
managers make various plans and strategies to supervise, administrate and control their workers
activities. Budgetary control is a procedure, in which, firm managers tries to control costs with the
maximum set limit and put efforts to maximize their revenues with the key focus to increase return
(De Campos and Rodrigues, 2016). There are some important budgetary planning tools which firm
must use for business that are presented below:
Incremental budgeting: This is a traditional method which need slightly changes in the budget
that was prepared last year to arrive budget for the new year. The method uses same resource
allocation basis used in the preceding year (Lennox and et.al., 2017). For example: By making
increments in the existing monetary framework Unicorn can develop competent financial plan for
the upcoming time period.
Benefits:
 This method retain stability and helps Unicorn Ltd departments in consistent evaluation of
their functionality.
 Relatively easy and simple to understand
 Avoid conflicts as treat all the divisions equally.
 Easy to maintain coordination
Drawbacks:
 It is not useful as it fails to consider changing market circumstances.
 Do not offer internal team members to come up with creative thoughts.
 No incentive for cost reduction
 Outdated budget
 Every year, expenditures are increased
 Budgetary slack through overestimation
Zero-based budgeting: Under ZBB, requested budget is prepared after evaluating thoroughly
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the market environment considering commencement from zero as base. It works on the principle
that, projected income and expenditures for every programme must commence from fresh point
through performing cost-benefit analysis. For example: According to this budgeting tool, by making
evaluation of all the activities that need to be done during specific time frame Unicorn can develop
financial plan effectually.
Benefits:
 It focuses on the activities instead of functional divisions of Unicorn Ltd.
 It is the most popular way for discretionary costs i.e. research, advertisement, training costs.
 Unicorn Ltd policymakers can use it to assure cost-effectiveness of various decision
packages (Sehgal, 2017).
 It begin from lowest activity level and moves upward.
 Cost-benefit analysis allows efficient resource allocation strategy.
Limitations:
 It is a bottom up budgeting, hence, the process is so bureaucratic and also takes a lot of time.
 ZBB method requires trained personnel with fully aware of the method who are skilled
enough to perform cost-effectiveness analysis (Jager and et.al., 2014).
 It requires too much paperwork and determine too much unmanageable.
 ZBB is based on hierarchical structure that reinforces functional difficulties.
Fixed budgeting: As its name, budget that is not easy to adjust or flex when any other
activity is changed, is called fixed or static budget. Thus, the method determines exact money that
Unicorn Ltd needs to spent and income level only at a given volume.
Benefits:
 The method allows enterprise allocating limited capital towards essential business
requirements i.e. overheads and money left represents profitability.
 The technique helps owners to keep track of daily activities and pursue positive
improvements in the business financial outcome (Montoya, 2016).
 It keep spending level down abiding by the set of strict rules and regulations.
Drawback:
 No flexibility to adjust target at different level.
 It does not help Unicorn Ltd in allocating more resources to the underperforming activities
to introduce improvements.
 In current era, where external forces changes quickly, the method is not useful to experience
year-to-year fluctuations.
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Flexible budgeting: Many establishments use flexible budgetary technique to adapt changes and
introduce necessary adjustments for external market forces such as inflation etc. It offers flexibility
to Unicorn Ltd to flex targets as per the level of activity.
Benefits:
 It adapt changes according to the market circumstances or changes.
 It enable Unicorn Ltd in creating an efficient fund allocation plan.
 It is obvious, that company can face variations subjected to material costs, production
overheads, selling price and others. These variations plays a decisive role just by simply
comparing planned outcomes against actual results (Novas and et.al., 2017) .
Drawbacks:
 Managers must be able to introduce changes accurately, however, continual monitoring and
examination of business environment is time-consuming.
 Although, it helps in adjusting targets for material price, competition, technology efficiency,
interest rates, however, continue adjustments may not be necessarily beneficial for Unicorn
Ltd.
In order to put sound control, various techniques are used by the business including variance
analysis and responsibility budgeting that are discussed here as follows:
Variance analysis/Standard costing: Budgets prepared by any method is used to evaluate
actual performance. In this method, at the end of the period, actual performance outcome are
matched against challenged targets set earlier in the budget. It helps deriving deviations, also called
variances (Sehgal, 2017). Finding out the correct reasons of such variances assists Unicorn Ltd’s
policymakers in making informed decisions to control the impact of these factors in future by
proper advance planning. For instance, if competitor may offer quality goods at cheaper prices, then
it is obvious that demand for Unicorn Ltd goods will be decrease, as a result, its sales volume will
be affected negatively. The technique is crucially important in order to respond negative deviations
by corrective measures and thereby attain goals.
Benefits:
 Performance analysis
 Align all the managers and workers effort to the strategic goals.
 Helps in corrective decisions to respond unfavourable results
Limitations:
 Comparative analysis of actual and budget takes time, which in turn, it is probable that
Unicorn Ltd managers can make delayed measures to combat variance occurrence.
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