Management Accounting Report: KEF Ltd. Cost Analysis

This report provides a comprehensive analysis of management accounting principles and practices, focusing on their application within a manufacturing company, KEF Ltd. The report begins with an introduction to management accounting, defining its role in decision-making and outlining the essential requirements of various management accounting systems, including cost accounting, price optimization, inventory management, and job costing. It then delves into different management accounting reporting methods, such as budget reports, cost accounting reports, accounts receivable aging reports, and inventory reports, highlighting their significance in facilitating internal communication and informing stakeholders. The report further explores cost analysis techniques, specifically absorption and marginal costing, and demonstrates their application in formulating income statements. It includes detailed calculations of production costs and cost of sales. Additionally, the report examines the advantages and disadvantages of different planning tools used for budgetary control and compares how different business entities apply management accounting systems to address financial problems. Overall, the report provides a practical understanding of management accounting and its crucial role in supporting effective financial management and strategic decision-making within an organization.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1. - Management accounting and essential requirements of various type of management
accounting systems:................................................................................................................3
P2. - Different kind of methods used in respect of management accounting reporting:........5
TASK 2............................................................................................................................................8
P3. - Computation of costs applying appropriate cost analysis techniques to formulate income
statement applying absorption and marginal costing:............................................................8
TASK 3..........................................................................................................................................14
Advantages and disadvantages of different types of planning tools used for budgetary control:
..............................................................................................................................................14
Comparison of business entities applying management accounting systems for responding
different financial problems:...............................................................................................16
CONCLSUION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
The term ‘Management Accounting’ can be defined as that field of accounting which is
mainly concerned with the preparation of reports and other relevant books that facilitate
decision-making across all organisational levels. Such decision-making activities can be
attributed to the planning, controlling, coordinating as well as organising functions of a
business(Bargate, 2012). Such functions ensure that the business is able to align itself
strategically so as to deliver on its short-term and long-term goals competitively as well as
achieve its mission and vision. This report aims to provide a comprehensive account on the
various management accounting systems as well as report. In addition to this, the report also
entails costing techniques along with their implications on net profit earned by a company. Also,
different planning tools used for budgetary control, financial governance, Benchmarking and
Key Performance Indicators have been discussed so as to give a view about development of
budgets, identification of financial issues as well as their resolution. For this purpose, KEF Ltd, a
medium sized manufacturing company has been taken into account that mainly operates in the
Manufacturing Sector.
TASK 1
P1. - Management accounting and essential requirements of various type of management
accounting systems:
Management or Managerial Accounting can be defined as a discipline which
encompasses different types of processes and systems that are relevant in the production,
presentation as well as communication of financial reports that cater to the needs of different
stakeholders. It also aids in determining the strength of credit as well as inventory management
policies implemented by the top management so as to ensure that relations with creditors and
debtors are maintained effectively.
It is important to note that every management accounting system has a unique set of
requirements that make it essential for the business to assess before actually adopting and
implementing them across all enterprise levels. The main function of all these systems is to
generate accurate data regarding the processes they entail to be implemented in. Either directly
or indirectly, this information derived by utilising such systems helps the management to know
key strength as well as weak areas internal and external to the organisation (Bouwman, 2014). In

the context of given case scenario, KEF Ltd. is a manufacturing enterprise which comprises a
diverse set of functional departments such as Human Resources, Purchases, Finance and
Production among others. For this purpose it requires a wide array of highly customized
Managerial Accounting Systems that help in not only providing comparability based on past and
present performance but also help in forecasting of future possible strategies to improve KEF’s
competitive advantage. Mainly, these systems can be classified as under:
 Cost Accounting System:
This system facilitates profitability as well as optimality analysis. By Profitability
Analysis one means that by implementing relevant cost accounting systems one can
ascertain whether or not the cost incurred on production of goods and services has been
able to generate substantial revenues for the company. This is mainly done by preparation
of budgets regarding each cost centre. This way the business managers are able to
determine how profitable each cost centre has been in contributing to the bottom line
earnings of the company. On the other hand, these systems also help in measuring the
optimality by enabling the management to know whether the available resources have
been used with minimum wastage or not. For KEF Ltd., a cost accounting system will be
required to record production activities using Perpetual or Periodic Inventory System,
depending on the method it follows. This would enable the business managers to keep a
track of raw materials bought and used in the production of finished goods.
 Price Optimisation System:
It is important for a business to price its goods and services in a manner that depict
competitiveness as well as profitability in the external business environment. A Price
Optimisation System, thus, enables the business managers to determine the most optimal
price for their product offering which not only minimises cost but also maximises profit
for the company. One of the main benefits of this system is the availability of alternative
scenarios (Din, 2014). A business Manager of KEF Ltd. does not need to waste time
contemplating what are the possible contingencies and fallouts that may hinder the
profitability of the company. They can utilise this system to know the best as well as
worst case scenario and price their product offerings accordingly. Hence, the most
essential requirement of this system is to be aware of the up and down supply chain in

both B2B and B2C contexts so as to rightly ascertain what price is right against the
customers’ willingness to pay for its product offerings.
 Inventory Management System:
A company can crumble into pieces if does not stay precautious in looking after its
inventory. Usually, the term inventory is mainly referred to the stocks of raw material or
work-in-progress as well as finished goods produced using such materials. This system
ensures that stock-levels are maintained in an optimal manner and promotes the practice
of cost minimisation at all enterprise levels. It is impossible to manually count and keep
track of all the inventory supplies such as spare tools, equipments and work-in-progress
among others. Through the implementation of this system, KEF Ltd. is able to ascertain
economic order quantities regarding different materials and supplies. Also, the business is
facilitated with the ascertainment of restock, safety and buffer stock levels that are crucial
for uninterrupted working of production processes (Graham, Harvey and Puri, 2013).
Thus, implementation of this system can help the business managers of KEF Ltd. in the
identification, classification, recording and monitoring of inventories to assess the actual
cost of inventories in production and manufacturing activities. Also, any excessive
inventory costs incurred can be easily traced and minimised to increase profitability
margins for the organisation.
 Job Costing System:
Usually, this system is implemented by those organisations wherein the production
processes include high customization and are order or job based. Thus, each job consists
of specifications which require assignment of resources in a definite manner. For KEF,
this system can be utilised if the products are totally different from the production line.
Additionally, the manager would be required to ascertain information on two components
viz. Direct Material and Direct Labour. This is due to the fact that each job has its unique
set of requirements to be met with. With these two components, the manager would be
able to adequately allocate the resources for different job orders and successfully meet
their promised deadlines.
P2. - Different kind of methods used in respect of management accounting reporting:
Under Management Accounting Reporting, the information regarding different processes
and systems needs to be communicated among different organisational levels so as to ensure

coordination among each department operating within the business. On the other hand, reporting
also helps in informing various internal as well as external stakeholders about the operations,
profitability, future plans as well as performance of the organisation for a given accounting
period. Hence, more than one accounting report is prepared by a business enterprise that aims to
serve a special purpose for the business management. By using such reports, the management is
able to have an overall idea about individual performance of each unit and is enabled to come up
with different strategies to improvise them on a continual basis. Thus, helping organizations to
achieve their short-term as well as long-term objectives in a sophisticated and planned manner
(Kurniawati and MeilianaIntani, 2016). In the given case scenario, KEF Ltd. also prepares a set
of managerial accounting reports which help them in ensuring information flows among various
levels of management in a smooth manner. These reports have been enumerated and discussed as
under:
 Budget Reports:
A budget helps in the controlling of resources as well as costs in an effective manner. It
also ensures that excessive production costs and wastage of resources is minimised
whereas profitability is maximised. Preparation of such reports is helpful in identifying
any kind of deviations that may occur between the budgeted results and actual results.
Thus, it is an internal report which helps in comparison of predefined projections with
actual performance in order to achieve their short-term goals set for a specific period,
usually a particular accounting period. These reports may be prepared by KEF for
quarterly, weekly, monthly or annually for individual departments or the organisation as a
whole. Some of these reports are prepared in the form of Cash Budget, Purchase & Sales
Budget and Master Budget.
 Cost Accounting Reports:
Another form of internal management accounting report, a Cost Accounting Report is
one which facilitates recording, analysis and summarization of various costs such as
variable, fixed and semi-variable among others that are mainly associated with the
process of production. This report enables the management of KEF Ltd. to know the
ascertainment and allocation of costs both direct as well as indirect. Under these reports,
the input and output costs are matched with each other to determine the financial

performance of the company. In addition to this, this report also helps in comparing the
internal costs and expenditures with industry standards.
 Account Receivables Ageing Report:
For a business it is essential to maintain healthy customer relationships. In order to
achieve this, a company may sell goods and services on credit. Such a business will
always have certain amount of accounts receivables or Debtors shown on the Asset side
of their Balance Sheet. In addition to this, the enterprise would also formulate a report
known as ‘Account Receivables Ageing Report or Schedule’ (Loughran and McDonald,
2016). This internal report helps in determining how old the debt is and whether or not
the party would be able to repay it within the stipulated period. Thus, it lists out all the
unpaid customer invoices are overdue as well as yet to be overdue which ultimately
determine the potential bad debts and create necessary provisions for it beforehand.
Being a manufacturing business, KEF Ltd. has a lot of transactions that are carried out on
credit basis. The Company management is benefitted by preparing for any unforeseen
contingency beforehand.
 Inventory Reports:
This type of management accounting report is crucial for businesses of diverse nature and
sizes. Inventory is a crucial part of any enterprise; therefore, keeping a check on its
inflow as well as outflow is paramount. They enable in determination of actual
fluctuations in terms of number and value in regards to stock, spares, tools and
equipments among others. In the context of given case scenario, Production Managers at
KEF prepare the Stock-keeping report to assess and monitor the movements of stocks
among various stages of production processes. Also, any increase in storage costs,
carrying costs and ordering costs are successfully identified and controlled in order to
eliminate any kind of wastage.
Thus, integration of the management accounting systems with the reporting practices can
help the business managers to plan, control, organise and coordinate different managerial
functions in an effective manner. As a result, the organisation is able to enhance its profitability
as well as financial performance in an effective and efficient manner.

TASK 2
P3. - Computation of costs applying appropriate cost analysis techniques to formulate income
statement applying absorption and marginal costing:
(i) Production cost per unit:
(ii)Total production cost:
Absorption costing:

(iii) Aggregate cost of sales in respect of June:
Absorption costing:

(iv) Budgeted profit and loss statements.
Marginal Costing: This costing technique is one which enables the managers of a
business to ascertain the impact of variable cost on the volume of output produced. Thus, break-
even analysis also forms a crucial part of this technique. Also, this technique keeps fixed
production overheads unchanged. While computing the marginal cost per unit fixed costs are
considered as period whereas the variable expenditure includes direct costs such as material,
labour, expenses and variable production overheads.
Absorption Costing: Contrary to the Marginal Costing technique, the method of
Absorption Costing is one which includes fixed as well as variable production overheads in order
to determine the cost of individual product (Nielsen Mitchell and Nørreklit, 2015).
Profit and loss account by absorption costing method for month of June:

Profit and loss account using marginal costing method in respect of month of June:
Preparation of final account after June
Absorption costing: