Financial Analysis and Management Accounting for Nasty Gal Vintage

This management accounting report focuses on Nasty Gal Vintage, examining the concept and types of management accounting systems, their advantages and disadvantages, and their integration within the company. It includes the preparation of cost cards and income statements under absorption and marginal costing, along with a critical evaluation of the differences between these systems. Furthermore, the report covers the preparation of a flexed budget, variance analysis, and the use of planning tools for budgetary control. It also compares how organizations adapt management accounting systems to address financial problems and evaluates how planning tools contribute to sustainable success. Desklib provides a platform for students to access this and other solved assignments.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
(a).................................................................................................................................................3
Concept of Management Accounting..........................................................................................3
Different types of management accounting systems and their advantage and disadvantage......3
Various methods used for management accounting reports........................................................5
Integration of management accounting within Nasty Gal Vintage company..............................6
(b).................................................................................................................................................6
1. Preparation of cost card under absorption and marginal costing approach.............................6
2. Preparation of Income statement under absorption and marginal costing system...................7
3. Difference between absorption and marginal costing system.................................................8
PART B...........................................................................................................................................9
Preparation of flexed budget and calculation of variances between actual and flexed budget. . .9
i) Advantages & disadvantages of planning tools used by management for establishing
budgetary control.......................................................................................................................10
ii) Incorporation and critical analysis of planning tools............................................................12
PART C.........................................................................................................................................13
(a) Comparison of how organizations can adapt management accounting system to respond to
financial problems.....................................................................................................................13
(b) Critical evaluation of how planning tools solve financial problems to lead organization to
sustainable success.....................................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES................................................................................................................................1

INTRODUCTION
Management Accounting (MA) is basically a process of identifying, measuring, analysing,
interpreting and further communication the financial information with the managers so that they
can use this accounting information in decision-making process. This report is based on the
Nasty Gal Vintage company that offers variety of vintage clothing and other items to its
customer through their eBay account. This report will discuss the concept, types of management
accounting system, reports along with their advantage and disadvantage. Further, the report will
also discuss the integration of management accounting within Nasty Gal Vintage along with the
computation of income statement under marginal and absorption costing system. The report will
than critically evaluate the difference between marginal and absorption costing systems. Further,
the report will cover the computation of flexed budget and variance calculation between actual
and flexed budget. Lastly, the report will cover the different planning tools used for budgetary
control along with the comparison of how different organization uses these tools for solving their
financial problems and achieving sustainable success.
PART A
(a)
Concept of Management Accounting
As per the Institute of Cost and Management Accountant (ICMA), London, management
accounting is the application of professional knowledge and skills in preparation of accounting
information which the manager further uses it for the formation of policies, planning &
controlling of operational activities and financial decision making (Astuty and et.al., 2021). For
example, if the manager wants to make the decision on whether to buy a specific product from
supplier and then sell it to customer or produce the product in house and then sell, the manager
of Nasty Dal Vintage can use break-even technique of MA which is known as make or buy
decision.
Different types of management accounting systems and their advantage and disadvantage
The different types of management accounting system, that can be adopted by manager of
Nasty Dal Vintage for better decision-making are as follows:

Cost-accounting system: This is a system of MA which helps in distributing the total cost
of production into direct and indirect cost which further helps in identifying per unit production
cost of products. For example, if the manager of Nasty Dal Vintage wants to set suitable price of
their vintage clothes than they have to adopt this system because based on per unit production
cost of clothes suitable price of vintage cloth will easily determine.
Advantage:
 It is helpful for eliminating wastes, losses and inefficiencies in the operational activities
by fixing standards for every product.
 On the basis of this system, the management of company can easily make decision on
whether make or buy a product in open market (ALmashkor, 2022).
Disadvantage:
 Under this system, the cost of overheads is absorbed on predetermined rates thus it
causes over absorption and under absorption issue.
Inventory management systems: This is a system which is generally used by the company
for inventory valuation and identifying closing stock of raw material using method like LIFO,
FIFO and AVCO. For example, if the manager of Nasty Dal Vintage wants to identify the
requirement of raw material used for producing vintage cloths, then they have to use this
inventory management system.
Advantage:
 It helps the company in maintaining the right amount of stocks which further leads to
reduction in the wastage of resources.
 Inventory management through bar code scanner and software improves the efficiency
and productivity of employees.
Disadvantage:
 Sometime this system became complex and difficult to understand and use on the part of
rural staffs (Gutiérrez, 2021).
Job-costing systems: This is a system which helps the management of company to track the
cost of individual projects and jobs. It broken down the total cost into three categories i.e.,
material, labour and overheads. For example, if manager of Nasty Dal Vintage need to track the
cost of its any projects such as fashion show, then they can use this MA system.

Advantage:
 The profit earned from each job and projects are easily ascertainable for company.
Disadvantage:
 The job costing system is expensive for the company (Hargie, 2021).
Price-optimising systems: This system helps in determining the demand of their product in
the market. For example, if manager of Nasty Dal Vintage wants to increase their profit margin
then they can increase selling price of their vintage cloth product based on possibility of
customer to pay more.
Advantage:
 It will help in increasing profit margin of the company with the increase in selling price.
Disadvantage:
 Sometime, it may lead to loss of customer if the customer is unable to pay high price for
products (Natafji and Cramer, 2021).
Various methods used for management accounting reports
The various methods which manager of Nasty Dal Vintage can use for management
accounting reports are as follows:
 Budget Reports: This report consists the estimated income and expenses the company
will earn or incur in the upcoming years. For example, manager of Nasty can prepare
production, purchase etc. budgets based on the previous experience to achieve its goals
and mission within the budgeted amount.
 Account Receivable aging reports: This report cover the information regarding the
customers from whom payment is due and list of suppliers to whole payment is due
(Nuleg and et.al., 2021). For example, if Nasty company heavy deals on credit basis then
they have to use this report manage their credit policies and cash flows.
 Cost managerial accounting reports: This is another report of MA which involve the
information regarding the all raw material cost, labour cost, overheads and then divided it
by number of units produced. For example, the manager of Nasty need to prepare this
report to identify the inventory waste, per units cost production and also better optimizing
resources among department.

 Performance reports: Last method of MA report is performance report which involve
the record of employee’s performance. For example, if the Nasty company really wants
to retain its talented workforce within themselves then they have to keep record of each
employee performance reports. On this basis, they can provide monetary and non-
monetary benefits to retain them (Nyakuwanika, van der Poll and van der Poll, 2021).
Integration of management accounting within Nasty Gal Vintage company
Management accounting helps the company manager in making critical decision in the
easiest way via techniques and tools of MA. With the integration of management accounting
system within the Nasty Dal Vintage, the manager of company can easily measure its
employee’s performance and list out the name of employees who are performing better or who
need more training. With proper training to employees the efficiency and productivity of
employees are easily improved. The impact of which Nasty sales and profitability will also
increase. Beside this, the manager of Nasty also integrates management accounting within the
organization in order to assess the risk. It is because MA helps in identifying and assessing the
various internal and external factors which can harm the financial and operational health of
business. Along with this the application of MA system also help the managers in allocating the
resources among each department and activities in best manner possible (CHIMA, 2022). With
the integration of ratio analysis technique, the manager of Nasty company able to present precise
financial reports via using various financial and cost data so that users can make suitable and
profitable decision. It means the management accounting software reduce the work load of
manager with and also the chances of error and mistakes.
(b)
1. Preparation of cost card under absorption and marginal costing approach
Cost card under absorption costing
Particulars Per unit
Direct Material 10
Direct labor 15
Fixed overheads 25
Total cost of production 50

Cost card under marginal costing
Particular Per Unit
Direct material 10
Direct labor 15
Total cost of production 25
2. Preparation of Income statement under absorption and marginal costing system
Income statement under absorption costing
Particulars Details November Details December
Sales unit 10000 8000
Selling price 70 70
Sales Revenue 10000*70 700000 8000*70 560000
Less Cost of sale:
Cost of production (as be above cost
card) 500000 400000
Less closing stock 0 500000 100000 300000
Net Income 200000 260000
Income statement under marginal costing
Particulars Details November Details December
Sales unit 10000 8000
Selling price 70 70
Sales revenue 10000*70 700000 8000*70 560000
Less Variable cost excluding closing
stock ( as per above cost card) 10000*25 250000 8000*25 200000
Contribution 450000 360000
Less Fixed cost:
Fixed overheads 250000 250000

Net income 200000 110000
Note: There is no closing stock is November month but there is 2000 units of closing stock in the
month of December.
3. Difference between absorption and marginal costing system
Basis Marginal costing Absorption costing
Meaning This is a decision making technique
which is used for ascertainment of
total cost of production.
The total cost of production is
determined via allocating the total
cost to the cost centre is known as
absorption costing.
Cost recognition The variable cost is considered as
product cost while fixed cost is
considered as period cost.
Both variable and fixed cost is
considered as product cost.
Classification of
overheads
The overheads are classify into
fixed and variable (CHIMA, 2022).
While, on the other hand,
overheads are classify into
production, administration, selling
and distribution.
Profitability The profitability is calculated in
this approach using Profit Volume
ratio.
While in this costing approach, the
profitability is highly affected
because of fixed cost inclusion
(Nuleg and et.al., 2021).
Highlights This highlights contribution per
unit.
This highlights net profit per unit.
Reason of difference between the recorded profit under marginal and absorption costing:
The main reason behind the difference between the profit under marginal and absorption
costing is fixed cost seized under closing stock. When the number of units produced is higher
than the number of units sold than the profit under absorption costing is higher than marginal
profit (Natafji and Cramer, 2021). It is because absorption costing system absorbed value of
fixed production overheads under closing stock.

Support of management accounting techniques in making financial decision of Nasty Gal
Vintage:
The management accounting techniques will help the manager of Nasty Dal Vintage in their
financial decision-making process in the following ways:
 Ratio analysis: This is a technique of MA which help the manager of Nasty in
determining the profitability, liquidity and efficiency performance of business. They can
further make decision on whether to acquire more funds from debt or equity using debt-
equity ratio.
 Marginal costing: The marginal costing technique will help the manager of Nasty to
identify the break-even sales units. The break-even sales mean the sales where the
company will neither earn profit nor loss. This help them in making the decision
regarding make or buy decision (Hargie, 2021).
 Investment appraisal: The another technique of MA includes investment appraisal which
help the manager of Nasty in making the decision regarding selection of profitable
investment projects. The manager can use NPV method to identify profitable projects out
of alternatives and make right decision.
PART B
Preparation of flexed budget and calculation of variances between actual and flexed budget
Particulars Budgeted Per unit
price and
cost
Actual
results
Flexed
budget
Variances Favourable
or
Unfavourable
(Adverse)
Production
(in units)
10000 12000 12000
Sales (in
units)
10000 12000 12000
Sales revenue 100000 10 122000 12000 *
10 =
120000
2000 Favourable
Less:

Variable
costs
Direct
material
50000 5 60000 12000 * 5
= 60000
0
Direct labour 25000 2.5 28500 12000 *
2.5
= 30000
1500 Favourable
Variable
overhead
12500 1.25 15000 12000 *
1.25
= 15000
0
Contributio
n
12500 18500 15000 3500 Favourable
Less: Fixed
costs (Fixed
overheads)
10000 11000 10000 (1000) Unfavourable
Profit 2500 7500 5000 2500 Favourable
i) Advantages & disadvantages of planning tools used by management for establishing budgetary
control
A budgetary control can be established by preparing a budget for a business in order to
control and plan the various activities of the organisation such as production, selling, promoting
coordination among different departments and evaluating performance. Planning tools used in
establishing budgetary control refers to those components that is helpful for the organisation in
accomplishing their desired goals in a desired manner (Rizza and Ruggeri, 2018). Budgetary
control allows for practicing the evaluation go actual results against that of budgeted one. With
the help of budgetary control and planning tools therein, analysis of variance become possible
along with the taking corrective actions against unfavourable variances. The different planning
tools used in business for budgetary control and their advantages and disadvantages are as
follows:

Budgets: It is prepared in the beginning of the period which indicates the estimations of
revenues and expenses that are expected to be incurred in the business within the certain time
period in an attempt to realize the set organizational goals (Samuel, 2018).
Advantages of budgeting
 It allows for tracking business activities which involves both revenue and expenses and
accordingly, by limiting expenditure through budgetary control, sufficient amount of
money could be saved.
 Budget helps in implementing overall business planning and facilitates decision making
for the achievement of overall goals of the organisation.
Disadvantages of budgeting
 Budgets set out in the beginning are not always accurate as the actual activity levels may
differ in various aspects making the efforts and resources used for budgeting wasteful.
 Budgets if prepared at low targets seems to be quite easy to achieve and render no
benefits for the business as it leads to lower output level and higher costs for the business
(Mirbagheri Roodbari and Kordestani, 2020).
Variance analysis: In the above calculation, variance has been analysed by obtaining the
difference between the actual results against the budgeted one. The analysis of variance allows
for making decisions in order to correct such differences between the actual and budgeted
figures.
Advantages of variance analysis
 It allows manager to be proactive in attaining their set targets by identifying and reducing
the potential risks at the earliest that may affect their performance.
 It helps in understanding the reason behind the occurrence of fluctuation in actual results
against what has been planned in the beginning along with identifying the ways through
which such variances of adverse nature could be reduced (Pelz, 2019).
Disadvantages of variance analysis
 It involves a lengthy process within companies to determine the amount and cause of
variance which leads to much higher costs.

 Also, the calculation, investigation and reporting of variance is highly complicated which
requires on the part of companies to employ professionals which leads to again higher
costs for the business.
ii) Incorporation and critical analysis of planning tools
There are various planning tools that could be incorporated within the organization to facilitate
estimation and forecasting of future outcomes, such as the following:
Breakeven point: It indicates the level output at which neither the business earn profit nor incur
losses and thus helps in setting minimum standard that must be achieved by business for their
output level to cover their overall costs (Rizza and Ruggeri, 2018). Therefore, this planning tool
is helpful in measuring different level of profit and losses at various output level and thus
facilitate forecasting of effect of changes in sales price. Also, establishment of coordination
among fixed and variable costs become possible and its impact on profitability could be easily
determined. However, several assumptions on which this planning tools is build such as
constancy in sales price, sales and production at all the time is not true and reduces its validity.
Inventory valuation: It is helpful in identifying the amount of unsold inventory and cost of
goods sold at the end of period and accordingly, excess or shortage of inventory are determined
which is a necessary information due to having effect on profitability and production of the
business.
Costing approaches: there are various costing approach which helps in identifying what are the
actual costs against budgeted costs. Absorption costing and marginal costing are the two most
important costing technique through which cost allocation can be done to different department
and products of the business (Samuel, 2018). Accordingly, the minimum level of profit needed to
be made by setting an optimum price could be possible and thus helps in establishing control
over costs.
Various types of budgets: Different types of budgets allows for measuring actual performance
against the budgeted one. So, that discrepancies could be identified at earlier stage along with
taking necessary steps to reduce and avoid these discrepancies. Thus, helps in establishing
control over business affairs.