Analysis of Management Accounting Systems and Reporting Techniques

This report delves into the realm of management accounting, exploring its core concepts and various systems, including cost accounting, inventory management, job costing, and price optimization. It examines the significance of integrating reporting and systems within organizational processes, using Severn Trent, a UK-based engineering company, as a case study. The report details the benefits of each system and how they apply to real-world scenarios. Furthermore, it evaluates management accounting reporting, covering accounts receivable reports, inventory management reports, performance reports, and budget reports. The analysis extends to how these reports are integrated into organizational processes to enhance efficiency and decision-making. The report highlights the role of management accounting in optimizing costs, managing inventory, and improving overall financial performance within the organization. It also provides a comparison of the benefits and applications of these systems.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
ACTIVITY 1....................................................................................................................................1
Management Accounting Systems:.............................................................................................1
Management Accounting Reporting:..........................................................................................3
Benefits of management accounting system and their applications:..........................................5
Evaluation of management accounting reporting and system how integrated within
organisational processes:.............................................................................................................5
Preparation of income statements using absorption and marginal techniques:...........................6
Usage of management accounting techniques and preparation of appropriate financial
reporting documents:...................................................................................................................9
Interpretation of Financial Reports:............................................................................................9
ACTIVITY 2....................................................................................................................................9
Planning tools applied for budgetary control:.............................................................................9
Analyse the usage of different planning tools and their application for preparing and
forecasting budgets:..................................................................................................................13
Adoption of management accounting systems to respond financial problems:........................13
Comparison in between organizations in context of use of management accounting's systems
to respond financial issues:.......................................................................................................14
Contribution of management accounting in sustainable success of the organization while
responding financial problems:.................................................................................................15
Application of planning tools to respond financial issue along with attaining sustainable
success:......................................................................................................................................15
CONCLUSION..............................................................................................................................15

INTRODUCTION
Management accounting system is primarily regarded as core utility or task of business
entity which circulates and retrieves fiscal information within organisational structure. It
comprises organisation's efficiencies of maintaining liquidity, compliance capacity, company's
economic flexibility and more. Easy accessibility of company's internal information assist
managing personnels in effective and efficient planning and major resources' allocation. On the
ground of such internal information an organisation could choose appropriate alternative and
take decisions with aim of company's future growth (Adegbile, Sarpong and Meissner, 2017).
This study focuses on this management accounting system theory and how much it enables an
organization track financial performance. For this purpose, a reputed engineering company of
UK is taken, named by Severn Trent. It is top regulated water and sewerage company operating
business through headquarter in England. In order to streamline company and to build good
image of company worldwide, Company's line managers adapted different management
accounting's systems for the purpose of spreading and enhancing understanding across various
divisions.
This study is segregated into two major parts. The first part consists of explanation about
management accounting's concept along with various types of management accounting system.
Moreover, it also exhibits significance of integrating reporting and systems within organisational
processes. While second part consists of advantage or features and disadvantage of numerous
planning tools assists in budgetary control's process.
ACTIVITY 1
Management Accounting Systems:
Management accounting is often regarded as managerial and cost accounting which
facilitates a smooth structure of optimising and analysing costs and other trade operations in
order to develop internal fiscal records, schedules and accounts. This term also relates to task of
gathering raw undefined information and converting such information into unique and relevant
information, which finally help in tracking business entity's efficiencies. It usually covers a range
of accounting manifestations such as margins, assessment, capital budgeting and costing of
products. In addition, its primary problem is with the entity's internal variables and the
preparation and presentation of a corporates' financial statement is essential for executives. In
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addition, executives of a organization can schedule short-term plans and day-to-day operations
with the support of management accounting (Balaman, 2016). Management Accounting
System can be described as an inner organisational process which defines the information of
economic and fiscal development of the company, the capacity to fulfil obligation, resource
allocation and more. It collects the significant information such as profitability, income,
excellent debts, etc. and report such data for managerial or business decision-making. Severn
Trent has also adopted different systems to handle and manage their different operations with
aim to achieve targets. Following discussed are key systems of managerial accounting as
follows:
Cost Accounting System: It is defined as a procedure of controlling the transformation
into finished goods of raw materials. In addition, it is mainly used by manufacturers to record
manufacturing operations. Cost accounting system pertains to a structure that offers an
anticipated inventory valuation, controlling costs, and beneficial evaluation cost of its items to a
business. The respective scheme evaluates the input expenses of each manufacturing stage for
this phase, as well as for fixed expenses such as depreciation on equipment and machinery
(Chang and et.al, 2014). A standard cost accounting system operates by monitoring raw materials
as they move through phases of manufacturing and in real-time progressively transform in to
finished products. In Severn Trent, it assist management officials in determining costs involved
in purifying and supply of water to different parties and people.
Inventory Management System: It is specified as a management system that keeps
record relevant to inventory like collecting inventory information stored in warehouse, inventory
supply, and much more. Inventory management is quite crucial for an company's supervisor to
be able to identify regularly regarding storage and stock supply. This systems assists in
effectively managing level of wide ranger of items of stock and control expenses originated
through inventory processes. This systems is mostly proffered by manufacturing industry as
business belongs to such industry as these business entities have small, moderate and large sized
stock items and different processed inventories (Turban, Volonino and Wood, 2015). Managing
such wast amount of inventory is difficult but by applying this system stock managers can easily
handle such task. In Severn Trent, managers are adopting it to manage storage of water and other
its inventory or store item. This also enables businesses to keep just-in-time inventory structure
where products should only be ordered as required from providers and supplies. No additional
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amounts are purchased and stored on subsequent stage for processing. Here are three most used
methods of inventory recording:
 LIFO: The last technique in, first out (LIFO) is applied to determine an stock accounting
value. The LIFO technique works on the assumption that first item sold is the last item of
the stock bought.
 FIFO: It represents of "first-in, first-out," is indeed a practice related to entering of
inventory in records which presumes that first items held in stock are first items sold.
Therefore, the stock at year end is made up of the latest in inventory products (Lavia
López and Hiebl, 2014).
 Average cost method: A weighted average cost of stock is used in this method for
valuing inventories at year end.
Job costing system: Job Costing system relates to an order-specific costing procedure
that is used in circumstances where each manufacturing job is distinct and conducted in
accordance with specific client requirements. It includes maintaining a direct and indirect cost
account of corporation, which is strongly linked to a job requiring heavy labour and material
input. Job costing systems systemically ascertain production expenses by separating them into
overheads, direct materials and labor costs, and forecasting them at their true value (Modell,
2014). Manufacturing companies use work costs to regulate use of raw materials, hours of work
and facilities by individually assigning the price of each consumer order. Severn Trent applying
this system to maintain accountability in its distinct job processes involved in water supply
system.
Price Optimisation System: It is represented as a structure used to sustain rates at the
time of manufacturing. This process helps to control the price of different goods at a point in
time. Through it managers track and analyse the impact on demand as a result of change in price
of company's products. In long-term this process provides competitive benefits by minimising
the prices of different products (Leitner, 2013). In Severn Trent rate of water supply is
determined by business managers by applying results of these system. Price of items fixed under
this system also provides cost effectiveness.
Management Accounting Reporting:
Management accounting reporting could be defined as a document report that effectively
presents statistics or company outcomes data. In addition, this report is compelled in each quarter
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presenting financial accessibility in a business entity. Reporting process is generally considered
as a part of managerial structure as it help in efficient circulation of information. Such
information is mainly obtained from different systems as discussed above. Circulation of
relevant information throughout the different levels of management accounting is important as it
provide assistance in taking appropriate decisions and actions (Kaiser, El Arbi and Ahlemann,
2015). In Severn Trent reporting and systems of management accounting runs simultaneously to
increase the operational efficiencies and provide quickness in decision-making structure. All
level of managing officials are involved in managerial reporting focuses on value addition in
information circulated in reporting process. In this context following are the significant reports
prepared by managerial officials, as follows:
 Account receivable report: These types of reports are produced by those businesses that
deal with their customers in credit-terms. It enables to evaluate the complete funds owed
that clients need to pay. In Severn Trent, this report is being produced by managerial
personnels to maintain an overall track record of amount outstanding and to be received
from clients. This report contributes towards identification of debtors who may be
bankrupt in near future. It assist in minimising the amount of bad debts over a specific
period. In company any modification in credit policies are done on the basis of outputs of
this report.
 Inventory management report: Such sort of report is mainly prepared in manufacturing
companies for keeping systematic record of its inventory's items. In Severn Trent this
report is being prepared by officials who are responsible for maintaining record of
inventory. It holds detailed but vital information and data of stocks which help business
entity in operating business tasks effectively. It is quite useful to managers since it can
assist evaluate inventory situation either in transport or in store (Kalkhouran and et.al,
2015). It is also very essential to produce this sort of report for all businesses like Severn
Trent as it can assist to operate the company properly and effectively. This report
contains all types of stock or inventory-related information.
 Performance report: This form of report is used in most businesses to screen the
efficiency of the entire business enterprise and the people working for the entity. In
Severn Trent, the executives draw up such report to assess the attempts taken by the staff
to effectively perform all allocated duties. The managerial people within company also
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uses this report to set and allot amount of bonuses, employment benefits and other
incentives depending on their performance to the employees. The company's market
status and position could also be evaluated using it. It benefits the entity as it can direct
executives to evaluate whether or not their company performs well.
 Budget report: The managers produce this report to match the business's budget
predictions and real results. It is an vital internal report that the management primarily
uses to evaluate whether or not company can fulfill its goals. This reports are produced in
Severn Trent by company's managing officials to assure that all organizational and
executive operations or tasks are carried out in the proposed fiscal budget or not. It is
beneficial for the business as it could assist business executives in making adequate
economic decisions to improve and achieve determined growth targets.
Benefits of management accounting system and their applications:
System Uses Benefits
Cost accounting
system
It applied in respective company
to determine the viability of
product cost fixed by company.
It advantageous for company to
minimize their overall cost of its
processes of supply of water.
Inventory
management system
It used to observe the movement
of large amount of stock and
assess the inventory costs.
It beneficial for company to
optimize their entire stock
expenses.
Job costing system Its segregates costs on the basis
of entity's major processes.
It help entity to provide
accountability in job processes
concerned with company's core
activities.
Price optimization
system
It applied by business entities to
provide consumer satisfaction at
reduced price in respective
company.
It attract customers and increase
customer base.
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Evaluation of management accounting reporting and system how integrated within organisational
processes:
Managerial personnels tries to interlink business processes with management accounting
aspects like its systems and reporting. Main motive behind it is to smooth-en the overall business
performance. In entity like Severn Trent, managing officials established a structure to closely
link all business functions with system and reporting of management accounting. As in entity
finance and accounting processes are dedicated to provide information for reporting under MA
and its systems. Company emphasizes on such integration as it ensures improvement in
company's internal and external performance.
Preparation of income statements using absorption and marginal techniques:
Absorption Costing: It is an approach for computation of net profit in which all fixed
production and other expenses are separately shown in income statement.
Marginal Costing: While in marginal costing expense are classified as production and
non production expenses, irrespective of their nature fixed or variable.
ANNEX (A)
Income statement by marginal costing method:
Particulars Quarter 1
Product A
Product
B
Sales 2566500 1440000
less: unit variable costs
Direct materials 935250 320000
Direct labour 391500 480000
Prime cost 1239750 640000
less: Variable production overheads 108750 80000
Contribution 1131000 560000
less: Fixed costs 410000 410000
Total profit/loss 721000 150000
Particulars Quarter 2
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Product A Product B
Sales 1003000 1719000
less: unit variable costs
Direct materials 365500 382000
Direct labour 153000 573000
Prime cost 484500 764000
less: Variable production overheads 42500 95500
Contribution 442000 668500
less: Fixed costs 482000 482000
Total profit/loss -40000 186500
Working note:
1.
Total variable cost per unit 51.5
COGS
Production cost 257500
Less: closing stock -25750 231750
2.
Per quarter standard production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 68200
absorption 6800
Income statement by absorption costing method
Particulars Quarter 1
Product A Product B
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Sales 2566500 1440000
less: Cost of sales
Opening inventory - -
Direct materials 935250 320000
Direct labour 391500 480000
Variable overheads 108750 80000
Fixed costs 410000 410000
less: Closing inventory -650 1844850 -4000 1286000
Gross profit/loss 721650 154000
Particulars Quarter 2
Product A Product B
Sales 1003000 1719000
less: Cost of sales
Opening inventory 650 4000
Direct materials 365500 382000
Direct labour 153000 573000
Variable overheads 42500 95500
Fixed costs 482000 482000
less: Closing inventory -3500 1040150 -2900 1533600
Gross profit/loss -37150 185400
Working notes:
1.
Total variable cost per unit 51.5
COGS
opening stock 25750
Production cost 303850
Less: closing stock -149350 180250
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2.
Per quarter standard
production 5500
Fixed production cost 75000
Fixed prod. Cost per unit 13.64
Actual cost 80476
absorption -5476
ANNEX (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
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Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Usage of management accounting techniques and preparation of appropriate financial reporting
documents:
For analysing performance of company form different point of view several techniques
are used by accounting and management personnels. Use of techniques like absorption and
marginal costing provide effectiveness in company's operations. Complete and detailed aspects
of company's performance can be evaluated by applying two or more techniques simultaneously.
An organisation like Severn Trent prepares fiscal reports and statements applying such
techniques for assessing the true position and performance of entity.
Interpretation of Financial Reports:
According to revenue statements produced on the premise of absorption and marginal
costing, the distinction in outcomes from both techniques is analysed owing to distinct
approaches used in both techniques for fixed costs. The figures of net income in respect of Q1 is
Pound 721000 and Pound 150000 respectively for item A and item B, and on other side in
respect of Q2 these are -40000 and 186500 respectively for item A and item B. While through
absorption costing figures of net income in respect of Q1 is 721650 and 154000 for item A and B
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