Management Accounting Report: Ovation System Analysis and Techniques

This report on management accounting provides a comprehensive analysis of various techniques and their applications within the context of Ovation System. It begins with an introduction to management accounting, differentiating it from financial accounting and outlining different types of management accounting systems such as cost accounting, job costing, and inventory management. The report then explores different types of management accounting reports, including budget reports, accounts receivable reports, and inventory reports, highlighting their significance to management decision-making. Task 2 delves into specific accounting methods like absorption and marginal costing, including income statement preparation and cost-profit analysis, such as break-even analysis. Furthermore, the report examines planning tools for budgetary control, evaluates the integration of management accounting systems, and assesses their role in responding to financial problems, comparing Ovation System to a competitor. The report concludes by evaluating planning tools for achieving sustainable organizational success.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Explaining types of management accounting with its essential requirements.......................1
B. Explaining different types of management accounting reports with their significance to
management................................................................................................................................3
C. Benefits of management accounting systems and their application.......................................4
D. Critical evaluation of the integration of management accounting systems and reporting ....5
TASK 2............................................................................................................................................5
A. (1) Explaining Absorption and Marginal Costing..................................................................5
A. (2) & C. Preparing income statement using both absorption and marginal costing
techniques with a financial reporting document on it.................................................................6
B. & D. Calculations on Cost Profit Analysis (break-even analysis) with an interpretation of
business activity data..................................................................................................................8
TASK 3..........................................................................................................................................10
A. Explaining demerits and merits of different planning tools for budgetary control..............10
B. Application of planning tools for analysing, preparing and forecasting budget .................11
C. Comparing adapting management accounting systems for responding to financial problems
...................................................................................................................................................12
D. Analysing management accounting techniques that could lead organisation to sustainable
success.......................................................................................................................................14
E. Evaluating planning tools for solving financial problems to attain sustainable success......14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is employed through senior management of organization for
extracting critical data of business on the basis of financial position through which daily
decisions related to operations are made. Present report will discuss all concepts related to
management accounting with reference to Ovation System. There will be appropriate
understanding on management accounting system with its various types. It will be applying
different range of management accounting techniques such as absorption and marginal costing
with its profit and loss statement. It will reflect calculation of break-even point and margin of
safety on its similar context. This report will also represent planning tools which are applicable
in management accounting with their merits and limitations. Further, it will articulate proper
comparison in between Ovation System and Compound Security System (major competitor) with
application of management accounting to respond on its financial problems. In the same series, it
will evaluate planning tools for solving financial problems and lead to attain organizational
success.
TASK 1
A. Explaining types of management accounting with its essential requirements
Accounting is of two types which are management and financial. Management
accounting is referred as the process of preparation of accounts and reports which give
appropriate and timely information related to finance and statistics to its managers for taking
decision from short and long term perspective. There is a huge requirement of managers of
department for forming various reports and to communicate information to team of senior
management. This data is not shared with lenders, other external parties and shareholders.
Financial accounting is replicated as a process of summarising, reporting and recording each
transaction of organization for giving accurate picture of its fiscal performance (Nitzl, 2018).
There are various types of management accounting systems such as:
Cost accounting system: It is a system of accounting which is used through
manufacturers for tracing activities of production with application of perpetual inventory system.
In simple words, accounting system is framed for manufacturers who track inventory flow on
continuous basis at different stages of production. It tracks raw materials on this stage and
converts the same into finished goods. These materials are used in production and on immediate
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aspect, these are recorded and credited through its accounts and debited from goods in process
account. It comprises of actual, normal and standard costing. Actual costing: It uses rate of actual and direct cost with its application for identifying the
cost of specific items. The hours of manufacturing time are analysed by managers along
with requirement of calculating actual cost of producing a particular product. Normal costing: It uses annual overhead rate which is predetermined for allocating
manufacturing overhead to its particular products. In simple form, its rate is directly
based on the expected overhead costs for whole accounting year and its volume of
production. Example could be rent or mortgage and depreciation on machine used for
producing products.
 Standard costing: This is estimated and predetermined cost for performing operation to
manufacture any good on the basis of normal condition. It is applicable as the target cost
and developed through analysis of historical data from motion or time study. Its example
could be cost of direct material, labour or manufacturing overhead (Saeidi and Othman,
2017).
Job Costing system: It engages the process of accumulating information related to cost
associated along with proper production or service job. There is a huge requirement of
information for submitting information of reimbursed cost to specific customer. The application
of information is used for identifying the accuracy for estimating system of organization. It has
gained capability for quoting price which allows for obtaining reasonable margin. This particular
information is used for allocating the cost of inventory to its goods which were manufactured. In
this system, it has to accumulate information related to direct material, labour and overhead. For
instance, it is appropriate for determining constructing cost of custom machine, building
construction and to design software program.
Inventory management system: It tracks goods via whole supply chain or business
proportion which is operated in it. This system covers each item of production to warehouse to
shipping, retail and each movement of stock and parts in it. There are various systems of
managing inventory such as periodic inventory, JIT, LIFO and FIFO. Periodic inventory: It is the system which updates on periodic aspect. It does not make
any effort for proper record of either cost of sales or of inventory.
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 JIT (Just in Time): It is a common technique for leaning methodology for designing to
raise efficiency and to cut cost. In the similar series, waste has been decreased through
receiving goods with its requirement.
B. Explaining different types of management accounting reports with their significance to
management
Managerial accounting reports gives information for trimming cost and rewarding
employees on the basis of high performance . It signifies the best financial outcomes of business
which are undertaken and time sensitivity of information related to finance. There are various
types of management accounting reports which are used by Ovation System such as:
Budget report: It is an internal report which is applicable through management for
comparing the budgeted projections which are estimated along with obtained number of actual
performance in specific duration. These are inaccurate and differ in huge aspect from
organization's actual performance. Ovation System could prepare this report on quarterly,
monthly and annual basis. It will give detailed overview about performance from its previous
years and fluctuations on this aspect. These are invaluable method for Ovation System for
monitoring business's financial health. It helps in making or buying decisions and with providing
a better understanding on performance variances (Budget Report, 2018.).
Accounts Receivable report: It is a critical tool for proper management of cash flow
with extension of credit to its customers. The problems related to collection process of Ovation
System could be extracted by its managers. If these accounts receivable reports are analysed on
periodic aspect then it would keep collection department from overviewing old debts (Bui and
De Villiers, 2017).
Inventory reports: This report gives information for helping the business to improve
decision making skills. Information related to current inventory and owners of direct businesses
on the basis of sensible purchase are outlined. It consists of items such as hourly labour costs,
inventory waste and cost of per unit overhead. The different assembly lines are compared within
business for highlighting improvement areas for giving bonus to departments that are performing
well. In nutshell, it optimises the level of inventory and ensures about appropriate tracking.
There are different methods for extracting inventory control report in Ovation System (Reports
of Inventory Management, 2018).
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C. Benefits of management accounting systems and their application
Cost accounting system: This system helps in clustering expenses and revenues through
cost object by distribution channel, product line and product for identifying profitable or need of
support. It extracts exact cause of issue and suggests appropriate solution to management. In the
similar aspect, it examines cost structure of possible acquisition with its appropriate justification.
The occurrence of actual cost could be compared with standard or budgeted cost for observing
business contribution to spend as compared to expected. The capability of business for
supporting increased level of sales by exploring amount which is exceeding capacity. It also
includes charges of direct labour to inventory along with allocation of factory overhead to stock.
It gives help for process of decision making and accuracy of financial accounts had been checked
in Ovation System.
Job costing system: The cost might be ascertained with completion of job at any stage
which provides scope for controlling costs by performing appropriate steps in Ovation System.
Each job helps in earning profit and individually it is known as Job costing. The management
could properly estimate each cost of job by considering previous records in it. Its actual cost of
present job could be compared with previous job execution. It might predetermine overhead
recovery rate on basis of budget. There is absence of under and over recovery of its overheads. It
helps in implementing budgetary control system with appropriate estimation with context of job
costing. The suitability of job costing is along with cost and contracts and it facilitates pricing of
each particular job (Hope, Thomas and Vyas, 2017).
Inventory management system: This system helps in achieving productivity and
efficiency in operations. With this context, adequate supply of specific product to accomplish its
demand which is very important to increase sales and customer services. If inventory
management system is computerized or manual then it would determine trend and to prepared for
requirements of customer. It streamlines operations as in facilities of manufacturing must
maintain appropriate inventory of supply which is mandatory for manufacturing products of
Ovation System. It is major advantage of an effective system of inventory management. It helps
for identifying adjustments of lead time and ensures about stock belongs to sale. In the similar
aspect, it decreases liabilities and loss created through overstock. It keeps proper track on supply
and demand and decline in sales to determine one time occurrence for preventing over orders of
particular products.
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D. Critical evaluation of the integration of management accounting systems and reporting
It is a system of software application which helps in standardizing procedures for tracing
each transaction and appropriate dissemination of information related to its financials. The
reporting activities are interlinked to various functional areas of business like point of sales, back
office, stores and front office. The whole information is streamlined with its output and input of
functions of financial reporting and management accounting. However, integration management
accounting system is adopted then it would directly enhances financial system along with
accuracy, speed, efficiency through proper process of financial information. It helps in enabling
and relay on real time information with context of business transactions.
Integrated management accounting serves as shop of one stop on basis of its information
which consists of managerial, cash flow and financial accounting. It has huge requirement of
maintaining separate procedure of accounting for preparing reports of financial, cash flow and
management. It has been critiqued that, data which is processed on automated aspect and
bookkeeping and accounts are simplified with application of this system. It substitutes
complicated and tedious activities of reconciliation and performs with non-integrated
management accounting system. This adaption is mandatory not a choice due to increment in
complexities of world of modern business with application of efficient system to maximise its
performance. However, Ovation System must ensure to choose affordable, user friendly and to
update flexible system to ignore complications in this implementation (Diouf and Boiral, 2017).
TASK 2
A. (1) Explaining Absorption and Marginal Costing
Absorption costing:
It is managerial costing method of allocating cost by including both fixed cost and
variable expenses in production of inventory. In absorption costing method all the expenses
incurred that is material cost, and indirect cost like overhead cost are considered while evaluating
the final price of a product (Noreen, Brewer and Garrison, 2014). It helps to recover all expenses
of production from the selling cost of that product. It is widely used technique of ascertaining
cost of a product. Absorption method of costing is also referred as full costing as it present more
comprehensive and accurate expenses incurred on the production of inventory.
Marginal Costing:
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It is the method of costing technique where the variable expense is considered to
determine the price of the inventory and fixed cost will consider as completely written off
against profit in that period (Quinn, Elafi and Mulgrew, 2017). Only variable cost are charged to
operations processes. It is not considered as a system of costing but taken as a technique which
concerned as change in the cost and profit from production with the change in variable expenses
in production of that product. It is not considered as a suitable technique to ascertain cost of
inventory as it does not determine the fixed cost in production whether it increases with
production or not.
A. (2) & C. Preparing income statement using both absorption and marginal costing techniques
with a financial reporting document on it
Income statement using Marginal Costing:
Income statement using Absorption Costing:
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To,
The General manager,
Ovation Systems
London, United Kingdom
Date: 4/10/2018
Sir,
This is to inform the higher authority of Ovation System about the costing techniques
which should be implemented in company to ascertaining the cost of inventory. By analysing
the calculation done above, it can be demonstrated that absorption costing method is accurate to
use in costing a price of inventory as it involves both variable and fixed expenses of production.
Where, marginal costing only considered variable expenses that is the price of output will
change with change in variable expenses (Hiebl, 2018). Marginal costing doesn't considered the
fixed expenses in product pricing and written off fixed expenses for the specific time period.
The Ovation System should opt for absorption costing technique, as it can be analysed from the
calculation of income statement with both method of costing.
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Implementing absorption costing will give higher net income that is 17700 pounds,
where marginal costing will give only 17500 pounds of net profit. Hence, using absorption
costing techniques will help the company to show accurate profit calculation to set final cost of
goods and services. This method is very important as it includes fixed manufacturing cost which
is also important in manufacturing process which required to be recovered from selling price of
products. Adopting absorption costing will provide complete picture of cost per unit of a
product line that will be helpful for a company management in evaluating profitability by
determining prices for the product and services offered by the company.
Thanks & Regards,
Management Accounting Officer
B. & D. Calculations on Cost Profit Analysis (break-even analysis) with an interpretation of
business activity data
Calculation on Break-Even analysis:
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Interpretation:
Break even analysis is a technique which is used by production management and
accountant of a company to ascertain the level of selling where, the cost of production can be
recovered. Hence, BEA is a financial tool that will help to evaluate management that at which
stage the product will start giving profit to company (Soldavini and Tyner, 2018). The
calculation of break-even will determine the number of sales volume which is required to cover
its fixed and variable cost of production.
The above calculation will help in determining various business data activity with the
help of break-even analysis.
a) Break-even point (in units): A point at which the sales revenue will be equal to the cost
incurred in production of that products will be same. That is the company will be at no profit no
loss situation, that point is known break-even point. From the above calculation, it can be
interpreted that BEP of the company is 222.
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b) Break-even point (in monetary term): The BEP value of company where the cost of
production is equal to the sales revenue is pound 8888.889.
c) Desired profit: The number of product that is required to sell in order to earn the desired
profit of pound 10,000 is 592.59259 units of product.
d) Margin of safety: The safety margin required if 800 products are sold is 722.
TASK 3
A. Explaining demerits and merits of different planning tools for budgetary control
According to CIMA, Budgeting is referred as formal quantitative expression of plan of
management. As it is quantified in monetary aspect which is prepared and approved prior at
given duration reflecting planned income which is generated and capital attained for specifying
objective.
Cash Budget: It refers to appropriate estimation of inflow and outflow of cash for
particular business at specific duration of time. Generally, it is used for assessing whether
liquidity for operation is sufficient or not. Its main objective is to give current status of
organization about its position of cash at single point of time. This tool helps in prioritizing the
period of payment related to budget (Ax and Greve, 2017).
Advantages
 It helps management for concentrating on its attention on important concerns which are
not proceeding as per plan.
 The communication is improved and gives appropriate understanding along with
consonant relationship within its employees.
 Coordination is improved in context of each activity within all departments of Ovation
System.
 It helps in reducing cost and to maximise profit in efficient aspect.
 It improves thinking of management and devise efficient as well as effective method of
handling its resources.
Disadvantages
 It is fully built on the basis of subjective estimate.
 The cooperation and operation of staff is associated with success.
 It takes huge time for accomplishing its objective.
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