Management Accounting Report: Analysis of Nisa Retail Accounting

This report provides a comprehensive analysis of management accounting, using Nisa Retail as a case study. It begins with an introduction to management accounting, its functions, and various accounting systems like traditional, lean, throughput, and transfer accounting. The report delves into the uses of different accounting methods, including financial planning, cost accounting, and budgetary control. The benefits of management accounting, such as reduced expenses, improved cash flow, and enhanced decision-making, are also discussed. Furthermore, the report examines cost calculation methods, specifically marginal and absorption costing. It explores the advantages and disadvantages of different budgetary planning tools and evaluates management accounting techniques in responding to financial problems, with a focus on achieving success through effective financial management. The report includes calculations, evaluations, and recommendations for Nisa Retail's financial management practices.

Management Accounting
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TABLE OF CONTENTS
Introduction......................................................................................................................................3
Task 1 ..............................................................................................................................................3
P1 Explaining the management accounting along with the different kinds of management
accounting systems......................................................................................................................3
P2 Uses of different accounting methods in management accounting system reporting............5
M1 Benefits and uses of management accounting system...........................................................6
TASK 2 ...........................................................................................................................................7
P3 Calculation of cost using marginal and absorption costing....................................................7
D1 Critically evaluation of management accounting system....................................................11
M2 Range of management accounting techniques ...................................................................12
D2 Producing financial report that accurately apply and interpret data for a range of business
activities.....................................................................................................................................12
Task 3 ............................................................................................................................................13
P4 Advantages and disadvantages of different types of budgetary planning tools....................13
M3 Analyzing the different planning tools and applications for forecasting the budget...........13
D3 Evaluating the planning tools that helps in to solve financial problems..............................14
Task 4.............................................................................................................................................14
P5 Selecting the management accounting techniques towards responding the financial
problems.....................................................................................................................................14
M4 Management accounting responds to financial problems in order to achieve sucess ........15
Conclusion.....................................................................................................................................15
References......................................................................................................................................16
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INTRODUCTION
Management accounting is the process of identifying, analyzing, recording and
presenting financial information that is used as internal information by management for
planning, decision making and control. It is also concerned with the providing helpful
information and reports to managers and entrepreneurs. It helps in planning of business
activities. Management accounting includes the integration of financial and non financial
statements that provide useful information to management that helps in to take effective decision
for the organization (Sullivan, 2017). The scope of management accounting is very wide it
contains all types of accounting information to particular organization.
The present report is based on management accounting and to understand this, Nisa case
study is taken in to consideration. It is one of the top leading retail chain in UK where it has been
offered wide range of product and services to customer at affordable prices. The choose firm
have 50 employees and an annual turnover is 500000 Euro. Various types of management
accounting techniques are to be used such as cost volume- profit analysis, marginal costing and
absorption accounting that helps in to evaluating the company financial condition. Nisa
accounting managers identifies and managing the accounting records for day to day activity
transactions. Management accounting officer are also responsible for preparing the budget and
controlling the expenses in order to manage high profitability of an organization. The main
objective of this report is to analyze existing cost accounting system and to develop product
costing on the basis of ABC.
TASK 1
P1 Explaining the management accounting along with the different kinds of management
accounting systems
Managerial accounting is the process of identifying, analyzing, recording and presenting
financial information that is used as internal information by management for planning, decision
making and controlling of business financial operations (Vitez, 2017). It is mainly concerned
with the providing helpful information and report to internal users such as managers and
entrepreneurs. Management accounting tools are may be different for different organization, it
basically depends on the size and policy of an organization. It increases the efficiency of an
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organization in financial term like financial position and company profitability through the
analyzing of inefficiency of accounting information. Management accounting provides fact and
information along with its interpretation that helps in to take decision by senior management
team, management accounting is a guide not a decision maker. Management accounting forecast
the relevant information of effective decision making through the analyzing of financial
statements, ratio analysis and fund flow analysis it provides approximate information towards
the forecasting of financial budget (Weygandt, Kimmel, and Kieso, 2015). Management
accounting helps management to record, planning and controlling the activities to decision
making processes. Accounting information are to be used within an organization and it focuses
on future accountability. Managerial accounting is not used for specific department of an
organization, it used for entire organization after the effective coordination of all departments. It
is a fundamental tool for making strategic planning. If an organization wants to develop new
product line and acquiring another business or expanding the existing business in to other
countries so that they uses number of tools for assisting decision making.
Functions of management accounting are:
Margin analysis- It determines the amount of profit that is generated from the specific
product, product line, customer, store etc. Cash flow statement also describes the amount of cash
at the beginning of a period and the amount of cash at the end of that period its difference shows
the profit and loss of the company. Profit is earned when the closing balance is higher than
opening balance.
Break even analysis- It is the position of no profit no loss of company. It determines the
price points for product and services (Fayol, 2016).
Constraint analysis- In constraint analysis element, factors or subsystem that work as a
bottleneck, It restricts an entity, project or system (such as manufacturing or decision making
process) from achieving its potential (higher level of output) with reference to its goal.
Target costing- It helps in assisting in the design of new product by accumulating the cost
of new designs, comparing them to target cost levels, and reporting this information to
management.
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Management accounting system tracks the cost of production of goods and services in a
company. A few of the most common accounting systems includes traditional cost accounting,
lean accounting, throughput accounting and transfer pricing methods are to be used.
Traditional accounting- It includes the job offer and process costing methods. Each of
these methods determines the allocation of funds to direct material, direct cost and
manufacturing overhead. Job order costing method are used for a large size project where all the
costs are easily traceable, Process costing method allocates the costs to number to processes that
is used to produce homogeneous product.
Lean accounting- It is most economical used method where cost reducing technique are
to be used for eliminating the waste. Management accountant gives immediate financial
information for making decisions, assessing value stream and measuring profitability.
Through put accounting- Accountants mainly focuses on identifying the certain
constraints within the company's production system. It includes insufficient levels of materials,
labor, or production capacity so that this accounting method helps in reducing these constraints
in order to allow for more throughput's towards the increment in production volume, thereby
lowering the cost for each individual unit produced.
Transfer accounting- It is another most common method that are flexibly used in most of
the retail companies like Nisa, Company calculates the cost of product or services according to
the number of department through which good are passes during the manufacturing process.
For Nisa it is important to plan the costs and understand the behavior of people and the
cost that is incurred on various activities over the period. The cost that is incurred by Smart
Looks Ltd. for the certain period to make his operations work smoothly are:
Material- Material is important for the company to manufacture the clothes, because if
raw material is not provided to the factory workers how will they be able to produce the product
and start the process of manufacturing the the cost involved in raw material acquisition is very
large because it is the main element of the process of making the clothes.
Factory Rent: Another cost which is related to Smart Looks is the rent of the premises
where manufacturing process will goes on and this costs is a fixed cost for Smart Looks because
whether if operations are held or not rent will be paid to the landlord or factory owner in any of
the case.
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Sewing Machines in Factory- Well the sewing machines have also an important place in
garment industry. It is one of the main assets of the clothing industry. As the power of sewing
machines are based on the unit of electricity it is variable cost.
Factory Supervisors Wages- It is Semi-variable cost for the company because a fixed
amount and also a performance based bonus is a variable aspect of the cost so, it is a semi
variable cost. Supervisors are also an important element in the industry and needs to be attended
very well.
P2 Uses of different accounting methods in management accounting system reporting
Several methods are to be used in management accounting system, these are stated that in
a manner below:
Financial planning- The main objective of any business organization is profit
maximization. It can be achieved by making proper or sound financial planning. It is the most
appropriate tool for achieving the business objective.
Financial statement analysis- It includes profit and loss account, balance sheet and
financial statements. From these analysis management are effectively know about the growth
rate of business concern. It can be done through comparative financial statements, common size
statements and ratio analysis (McKinney, 2015).
Cost accounting- It represents the cost according to product, process, department and
branch wise. These cost are basically compared with predetermined one.
Fund flow analysis- It find outs the movement of fund from one period to another. This
analysis helps to know about the allocated fund is properly used or not in a year compare to
previous one.
Cash flow analysis- It describes the movement of cash from one period to another.
Behind this cash balance and changes between two periods are also find out. It also describes the
cash from operations and the movement in a particular period.
Standard costing- It is a predetermined cost. It provides bench mark for measuring the
actual performance. It can be used for finding out the deviation between the actual and standard
performance.
Marginal costing- This technique is used to fix selling price of goods, optimum
utilization of raw materials and resources, it helps in to take make or buy decision. Acceptance
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and rejection of bulk or foreign order and other profit oriented things are taken in to
consideration under this technique.
Budgetary control- It is used for the estimation of future financial needs according to
order. It is used to control the financial performance of a business concern. It directed the
business operation in a desired direction.
M1 Benefits and uses of management accounting system
The benefits associated with management accounting systems are enumerated in the
manner below:
Management accounting system has several advantages. These advantages are usually
coincide with the company ability towards the improvement in company operations and
profitability. It helps in to achieve competitive advantage by developing cost allocation process
in its management accounting functions (Golini, Kalchschmidt, and Landoni, 2015).
Reduces expenses- Management accounting helps in to reduce operational expenses. It
helps in to review the cost of economic resources and other operation costs. It also provides the
information about the amount of cost are incurred in smooth running of business operations. In
helps in to analyze the quality of economic resources used to produce goods and services.
Improvement in cash flow- Budget are the major tool in the management accounting.
Budget are the financial road map for future business expenditure. Larger business organization
creates a master budget for entire organization. But organizations uses uses several smaller
budgets for division or departments. The main objective of budget is to save money through
careful analysis of necessary and unnecessary cash expenditures.
Business decisions- Management accounting improves the decision making ability of
business owners. Management accounting information are taking as decision making tool. it
usually provides a quantitative analysis of various decision making opportunities.
Increment in financial returns- Business owners uses management accounting in order to
increase company financial return. Management accountants forecasting the financial budget
relating to consumer demand, potential sales or the effects of changes in consumer prices in
economic marketplace. Management accounting information gives ensurity about the production
of goods and services in order to effective meet of consumer demand at current prices.
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Uses of management accounting is record keeping, planning and control or decision
making etc.
TASK 2
P3 Calculation of cost using marginal and absorption costing
Cost determination is the one of the important element of the management accounting
techniques, because inaccurate cost identification makes adverse impact on the Nisa pricing
decisions or vice versa. Accurate cost are identify by following techniques that helps to generate
higher profitability with minimization of wastage. There are following cost determination
techniques are to used such as marginal costing, absorption costing etc.
Marginal/ variable costing- It is ascertainment by differentiation of fixed costs and
variable cost. It is dependent on the volume of activity which are separated from the fixed cost.
Marginal cost are variable cost consisting labor and material cost plus an estimation portion of
fixed cost (Klychova, Fakhretdinova, Klychova, and Antonova, 2015). That kind of cost are
unchanged with a change in the volume of activity. Marginal costing helps in cost ascertainment,
cost control and decision for a particular time period. In addition to this it helps in profit
planning, pricing of production, make or buy decisions and product mix etc. It is used to know
about the impact of variable cost on the volume of production or output.
Advantages of marginal costing:
 It is easy to operate and simple to understand.
 It is useful in profit planning through break even and profit graph, it helps in to determine
profitability at different level of production and sale.
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 It helps in to take decision of make or buy.
 A clear cut division of costs in to fixed and variable cost that makes the budgetary control
flexible.
 Evaluation of different department cost are easy through the use of this technique.
 Under this technique fixed overhead recovery rate is easy.
Disadvantages of marginal costing:
 Segregation of all costs in to fixed and variable is very difficult.
 In marginal costing method greater importance are gives to sales function rather than to
production function (Busco, and Quattrone, 2015).
 Elimination of fixed cost from the inventory valuation is illogical because costs are also
incurred at the time of manufacturing the goods.
 The application of this technique is limited in case of industries because most of costs are
incurred during the manufacturing process.
Calculation of production cost Budgeted Actual
Direct material 3600.00 4200.00
Direct labor 3000.00 3500.00
Variable production overheads 1200.00 1400.00
Total cost of production 7800.00 9100.00
Add: Beginning inventory
less: closing inventory 1950.00 1300.00
Cost of sale 5850.00 7800.00
Cost of sale/unit 13 13
Marginal costing profitability statement
Particulars Budgeted Actual
Sales 14000 21000
less: Cost of sales (see above) 5850.00 7800.00
Variable sales overheads 450 600
Total variable cost 6300.00 8400.00
Contribution 7700.00 12600.00
Less: Fixed expenditures
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Administrative overheads 800 700
Selling cost 400 600
Total fixed cost 1200 1300
Net profitability 6500.00 11300.00
Profitability per unit 14.44 18.83
Absorption costing- It is a another managerial accounting cost method, it is the
manufacturing cost for the production of one unit. It includes direct material, direct labor and
fixed or variable manufacturing overheads (Shields, 2015.
Advantages of absorption cost method:
 It is consider for full cost method.
 This method is for seasonal sales.
 In this method no need of fixed and variable cost.
 The presentation of under- absorption and over-absorption of factory overheads in
absorption costing discloses inefficient or efficient utilization of production resources.
 It is the best way to determine total cost and profitability on a specific job
Disadvantages if absorption cost method:
 Many accountant argues that fixed costs are related to manufacturing, selling and
administration cost which are under consideration of period costs that does not produce
future benefits.
 It is not useful to management in decision making (Coad, Jack,and Kholeif, 2015).
 it is not useful for cost controlling.
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Calculation of production cost Budgeted Actual
Direct material 3600.00 4200.00
Direct labor 3000.00 3500.00
Variable production overheads 1200.00 1400.00
Fixed production overheads 1800.00 2000.00
Total cost of production 9600.00 11100.00
Add: Beginning inventory
less: closing inventory 2400.00 1585.71
Cost of sale 7200.00 9514.29
Cost of sale/unit 16 15.86
Absorption costing profitability statement
Particulars Budgeted Actual
Sales 14000 21000
less: Cost of sales 7200.00 9514.29
Gross profit 6800.00 11485.71
Less: indirect expenditures
Variable sales overheads 450 600
Administrative overheads 800 700
Selling cost 400 600
Total indirect expenditures 1650 1900
Net profitability 5150.00 9585.71
Profitability per unit 11.44 15.98
Interpretation:
As per to following outcome, it is clear that actual cost of production under marginal and
absorption costing has been determined to 11,100 & 7,800 respectively. Net profit has been
realized that 9,585.71 & 11,300 respectively. Marginal profit are greater than the absorption
profit. Contribution is measured at marginal costing method is 12,600 which is above than the
gross profit in absorption costing to 11485.71 because variable costing are used where
expenditures are vary according to the variation in output. Production overhead cost may be
fixed or variable according to situation.
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Difference between marginal and absorption costing:
 Marginal technique are at value inventory where variable production cost are to be used,
In absorption costing inventory are measures at full costing value.
 In marginal costing less volume of closing inventory, it gives less return, while in
absorption costing large closing inventory gives larger return.
D1 Critically evaluation of management accounting system
Management accounting system is really helpful for Nisa retailer to integrate and
summarize the result of financial activities in a meaningful manner in order to make effective
decisions for the prospective growth of an organization. Its information helps in to detect the
areas where Nisa mangers must put focus towards the improvement in operational areas, which
in turn, results in declining operational cost at greater return (Christensen, Lee, Walker, and
Zeng, 2015). In contrast, management accounting system reporting such as job report, cost
report, budgeting etc. helps in to analyze the firm performance that helps in to create the best
planning for the betterment. Internal organization report of Nisa presents the result for a
specified time duration. Management accounting system presents the report for more than one
duration at a single time time of point that is useful for trend analysis as well as forecasting of
budget. This system is helpful to work on the lean management principle in order to minimize
wastage of resources and business success.
M2 Range of management accounting techniques
As per the report, Nisa has been used marginal and absorption costing technique.
Marginal costing ascertains the total cost of production as variable cost. In absorption costing
method recognize both the cost fixed and variable cost. Profitability are quantified by the profit
volume ratio it includes total fixed cost that directly affects the net profitability. Marginal costing
measures profit per unit of contribution, It is measures outcomes in terms of net profit per unit.
Out of both the techniques, marginal costing method is more appropriate and used by the most of
organizations because it measures contribution and overall net profit and helpful in short-term
managerial planning (Busco, and Quattrone, 2015). In this, break-even point analysis, cost-
volume-profit analysis and margin of safety that assist the Nisa to make excellent plan for
deriving success.
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D2 Producing financial report that accurately apply and interpret data for a range of business
activities
To: Nisa board of directors
From: Management accountant officer
Date: 4th April 2017
Subject: Cost report
From the derived calculation from both the the costing techniques, Nisa company
achieve high actual profitability which is quantified that 11300. From the another costing
technique Nisa get 9585.71 actual profitability which is lower than the marginal costing
method, so Nisa uses the marginal costing in an organization. Absorption costing profitability is
lower due to the it consider only those expenditures which vary according to the changes in
production or output. Moreover both the expenses fixed and fluctuation in cost of production
and hence that reduces profitability (Tucker, and Schaltegger, 2016). Due to this, closing
inventory valuation has been reported differently under both the methods. Under both the
methods, in marginal costing stock has been valued at 1300 and in absorption costing method
stock has been valued at 1585.71. From the computed data full costing method are taken in to
account fixed production overheads worth is 2000 that has not been included in the cost of
production under marginal costing, as a result, both the method computed manufacturing cost at
11,100 & 7,800.
TASK 3
P4 Advantages and disadvantages of different types of budgetary planning tools
Budgetary control is the process where Nisa management construct the future period
budget through projection or compare it previous year budget (Otley, 2016). Different types of
methods and techniques are to be used in budgetary control that are discussed here as below:
Zero base budgetary- Nisa mangers construct budget taken into account zero as base, it
helps in to identify associated cost of every function through proper market research.
Advantages
 Realistic
 Helpful in effective planning
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Disadvantages
 Time consuming
 High needs of fund
Fixed budgetary- It is the financial plan it does not vary with the actual volume of Nisa
production.
Advantages
 It is helpful for measuring and examining the performance.
 It also helpful in strategic decision making and growth plan
Disadvantages
 It does not provide help in to compare the result if standard and actual output is different.
M3 Analyzing the different planning tools and applications for forecasting the budget
Nisa uses zero base budgeting tool which one projects the figure about the future period.
It is a flexible in nature in order to adjust the budgeted activity in accordance with the actual
volume of production that helps in to making comparison of actual business performance with
the set targets (Senftlechner, and Hiebl, 2015). Nisa departmental managers compare their
operational activities with the base of zero and helps in to measuring the variance between the set
standard and activity budget. It identifies the causes of failures that in terms to bring out with
positive result.
D3 Evaluating the planning tools that helps in to solve financial problems
Nisa managers uses the variety of management accounting tools for making viable
decisions towards the success in market place.
Variance analysis- Effectiveness of business activities can be examine through the
comparative analysis method or by examine the actual the result with the set of standards. If any
kind of deviation are incurred that may be either a favorable or adverse. With the help of this
Nisa retailer determines the causes of unfavorable variance.
Ratio analysis- Financial position and profitability can be examined through the different
kind of ratios such as profitability, liquidity, solvency and others (Carmona, Ezzamel, and
Gutiérrez, 2016). It is the best way for analysis the financial statement that helps to formulate
effective strategies, growth and expansion plan.
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Capital budgeting- It helps in to take qualitative decisions regarding to the non current
investment. There are various types of evaluation method like pay back, accounting rate of
return, net present value and internal rate of return.
TASK 4
P5 Selecting the management accounting techniques towards responding the financial problems
Management accounting system includes the course of costs which one is associated with
manufacturing and production function for producing one unit of finished goods.
Cost accounting system- This system is used as framework for estimating the product
cost, profitability and valuation of inventory. It gives guidelines to Nisa retailer for minimizing
the wastage and production cost in order to generate higher profitability.
Lean accounting- This method helps in to presenting a unique method or strategy towards
the minimization of excessive wastage. It also assist to Nisa about the unnecessary activities that
increases cost of production and helps in making decision regarding to the removal of
unnecessary activities (Senftlechner, and Hiebl, 2015).
Throughput accounting- It helps in to examine the less availability of resources and
materials and less skilled labor or other things. It helps in to formulate plans, strategies and
decisions that reduces these constraints in order to maximizing the production volume at lower
cost.
M4 Management accounting responds to financial problems in order to achieve sucess
Ratio analysis give information about the success or failure of Nisa from their regular
operations. Profitability ratio determines the profitability of an organization and helps in
overcome the financial problems through right pricing decisions, cost curtailments strategies and
effective supervision. Liquidity analysis maintains the current assets and liabilities under the
working capital of an organization (Shields, 2015). Solvency analysis assist to manager about the
designing of capital structure and management of financial costs towards the success of an
organization. Net present value method helps in to examining the total return form the
investment in different projects. It also helps in to minimize financial risk and decision making
regarding to different investment projects.
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CONCLUSION
From the stated report, it can be concluded that management accounting helps the Nisa
managers about taking financial decisions. various tools and techniques are to be used for
examining the financial condition of a company. Ratio analysis, variance analysis, capital
budgeting techniques are to be to resolve the financial problems. different management
accounting systems are to used to get maximum outputs like lean manufacturing, through put
analysis, cost accounting and transfer accounting system are used in order to eliminate waste,
cutting the production cost in turns to increase in profitability.
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