Management Accounting Report: Analysis for Oak Cash & Carry Ltd

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This report provides a comprehensive analysis of the management accounting practices at Oak Cash & Carry Ltd, a grocery wholesaler. It explores various management accounting systems, including cost accounting, price optimization, inventory management, and job costing, and their applications within the company. The report details different methods used for management accounting reporting, such as performance reports, account receivable reports, inventory management reports, and job cost reports, evaluating their benefits and integration within the organizational process. Furthermore, it delves into the calculation of costs using appropriate techniques like marginal costing, and discusses the advantages and disadvantages of planning tools used for budgetary control, along with management's responses to financial problems. The report concludes by highlighting how management accounting can lead to sustainable success in addressing financial challenges, providing a thorough overview of financial planning and control within the organization.
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Management Accounting
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Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and its types of management accounting systems........................1
P2: Different methods used for management accounting reporting............................................3
M1: Evaluate the benefits of management accounting system and its applications...................4
D1: Management accounting system and its reporting are integrated within organisational
process.........................................................................................................................................5
TASK 2............................................................................................................................................5
P3: Calculation of cost using an appropriate technique..............................................................5
M2 Various types of accounting techniques...............................................................................8
D2 Data interpretation.................................................................................................................8
TASK 3............................................................................................................................................8
P4 Advantages and disadvantages of different planning tools used for budgetary control........8
M3 Uses and applications of planning tools for preparing and forecasting budgets................10
P5 Responses of management accounting system to deal with financial problems.................10
M4 Management accounting can lead organisation to sustainable success in responding to
financial problems.....................................................................................................................12
D3 Planning tools respond appropriately to resolve financial problems..................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
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INTRODUCTION
Management accounting is the procedure of preparing management reports and accounts
which provide correct and timely financial and statistical data to managers which helps in
making short and long term decision. Management accounting plays an important role in
identifying, analysis, measurement and interpretation and communication of financial data which
management used in planning, evaluating and controlling of information within organisation.
Company follows four basic function of management process that are planning, organising,
controlling and decision making. Management accounting plays a essential role in these
managerial functions performed by all managers at different level of departments (Abdel-
Maksoud, Cheffi and Ghoudi, 2016).
Oak Cash & Carry Ltd is a grocery wholesalers with the registered office located in
Banbury, Oxfordshire UK. In this report company works on various management accounting
systems and its reporting techniques to evaluate company's performance. Cost accountant uses
various costing tools for evaluating its net profit. Oak Cash & Carry Ltd applies several planning
tools that are used in budget controlling and forecasting. Management adopt various accounting
systems to respond its financial issues that assist manager in leading Oak Cash & Carry Ltd to
achieve profitability.
TASK 1
P1: Management accounting and its types of management accounting systems
Management accounting is an essential part of every organisation working. Management
accountant of company develops information which help managers identify the more profitable
products. Company can use management accounting systems such as cost accounting, job
costing, inventory management and price optimisation system that are deployed to render
information for favourable decisions. Oak Cash & Carry Ltd is a grocery wholesalers and offers
a wide range of products in bulk for retailers, offices, caterers and other local businesses. So, it is
important for company to opt various management accounting systems in order to prepare
effective plans and decision to achieve it's objectives.
Types of management accounting systems are explained below:
Cost Accounting Systems: It is a form of management accounting systems, which helps
management to analyse its product's cost. Oak Cash & Carry Ltd purpose of following this
accounting system is to avoid moving over budget so that management can hold their revenues
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as much of possible. It will help management in determining the costs of products, processes to
ensure that financial statements and reports are as accurate as possible. It is used to identify
closing value of inventory that helps in preparing financial statements. It also assist Oak Cash &
Carry Ltd managers and authorised members of management in forming the most informed
decisions in company's financial planning. Because it provides accurate cost information related
to business. Actual, normal and standard costing are the examples of cost accounting in
determining product actual, budget and normal cost of material, labour and manufacturing
overhead. Company uses this method in identifying where it is earning and losing money (Brock,
Hinings and Powell, 2012).
Price Optimisation Systems: This system refers to customer's demand and the price of
the products is decided according to customer's preference at different price levels which will
help to attract customers and increase future profits. Company follow this system for determine
its initial, promotional and discount pricing. Oak Cash & Carry Ltd uses this system for setting
appropriate pricing strategy and enhance product value among customers that will affect its
profitability. This system consists various information related to operating costs, inventories and
past prices and sales. With the aid of price optimisation system Oak Cash & Carry analysis of
information that anticipate the behaviour of potential buyers at different prices. It also helps to
improve profitability and productivity of the company in order to attain its goals.
Inventory Management System: This system is used as inventory control system where
management can tracks two main functions of company's warehouse i.e. incoming and outgoing
of inventory. This system is important because it determine accurate level of inventory that
automatically minimize under and overstock conditions. First in first out, last in last out,
weighted average are the examples of inventory management. Oak Cash & Carry Ltd adopt this
management system for tracking inventory quantities efficiently across stocking locations and
also assist in making smarter inventory decisions. In order to maintain inventory levels
management uses functions of this system such as creating purchase and sales orders, physical
stock counts by using of FIFO method. This method helps in identify stock level. Oak Cash &
Carry Ltd use this system for improving its bottom line, inventory accuracy and
workflow(Christner and Strömsten, 2015).
Job Costing System: It is system that involves the procedure of accumulating data about
the costs linked with a specific production or service. Process, contract and standard costing are
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the examples of this costing system. Oak Cash & Carry Ltd is a grocery wholesalers and supply
products in bulk to several retailers, caterers etc. for this it need to follow this system for
acquiring information at various jobs. These details may be required in a way to submit the cost
information to retailers under a contract where costs are refund. Direct material, labour and
overhead costs are the three types of information that accumulate in this system. Oak Cash &
Carry Ltd follow standard costing system for comparing its estimated cost with actual used in
performing its operations (C.R. and Powell, 2012).
P2: Different methods used for management accounting reporting
Management accounting reporting consist accounting information which are derived
from the accounting records of a company. Oak Cash & Carry Ltd is small scale wholesaler
distributor to various retailers and trying to expand their business in future. So, it is essential for
company to prepare management accounting reports so that they maintain their statements on
continuous basis like monthly, quarterly for evaluating their performance. Except financial
reports, Oak Cash & Carry Ltd also need additional reports like budgets, performance and cost
reports of products in analysing its information. Management accounting reporting assist in
maintaining various types of reports such as performance, inventory management, account
receivable and job cost reports that provides necessary information in creating effective plans
and strategies.
Types of management accounting reporting are described below:
Performance Report: It is part of multiple layered report which company's prepare for
evaluating its performance at different levels and forecast for future growth. This report mention
a particular process which is consist of actual collection and transmission of overall performance
information in respect of the project to all related parties. Oak Cash & Carry Ltd prepare this
report for analysing its current status and compare with past for measuring the performance
progress as well as forecast some elements such as workers ability to perform tasks and market
potential of business at all levels. This report set guidelines for all level of managers in
maximizing their department performance which impact on company's overall performance and
also attract stakeholders. It is important for the company to analyse the performance of
employees and its business in market.(Cooper, 2017).
Account Receivable Report: It is one of the simplest methods for analysing the state of
organisation's accounts receivable and print an aging report that is a standard report of every
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organisation. Oak Cash & Carry Ltd prepares this aging report for identifying the amounts
owned by its customers including time duration at which the amounts have been unpaid and
demerits of forecasting tools outstanding. This report consist a list of non paying customers, their
invoices and credit notes which helps in characterising the average collection cycle. Oak Cash &
Carry Ltd also prepare this report for often increasing collection cycle so that company deals
with healthy sales practices. Company identify the list of unpaid creditors and recovery that
amount as soon as possible.
Inventory Management Report: This report display the level of inventory in company
processes. If company inventory is out of stock that may result in loss of customers and if it is
overstock that leads to production loss because of poor management and slow movement in
inventory. Therefore it is necessary for Oak Cash and Carry Ltd to maintain inventory
management report on regular basis. Company is distributor of grocery to various retailers and it
is important to maintain sufficient inventory level by balancing its under and overstock, so that it
meet demand on time. This the reason company find this reporting method very precious (Creel,
2012).
Job Cost reporting: It is a best practices of maintaining job cost reports which every
organisation should keep for identifying and evaluating job expenses so that company track their
efficiency and profitability. Oak Cash & Carry Ltd find this reporting for determining the cost of
several job orders. This reporting method provide a decisive information about current status of
job that assist in estimating the cost and revenue of final job. It also evaluate the investment
recovery amount which is spend on product and that will positively influence on its overall
performance.
M1: Evaluate the benefits of management accounting system and its applications
Management accounting system Benefits
Cost accounting system Oak Cash & Carry Ltd now easily
control their expenses.
It helps in measuring and improving
cost efficiency.
Price optimisation system It assist Oak Cash & Carry Ltd in
setting price according to its product
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demand.
It helps in determining customer based
pricing strategies.
Inventory management system It helps in identifying sales trend and
customer needs.
It reduces liabilities and loss created by
overstock of Oak Cash and Carry Ltd.
Job costing system It determines company's profitability of each
job individually.
It gives a basis for estimating cost of similar
job in future.
D1: Management accounting system and its reporting are integrated within organisational
process
Oak Cash and Carry Ltd uses several management accounting systems, reporting
methods for evaluating its internal information in order to maximize performance efficiency.
Management accounting systems benefit in organisation's inventory controlling processes by
using inventory management reporting. Job costing system helps in determining its profitability
at individual job levels and cost accounting system assist in measuring cost efficiency.
Performance reports help in evaluating performance at different level of organisation and
account receivable reports identify its average collection period. Therefore above systems and
reporting method evaluate company process that help in improving its performance and
profitability (Flamholtz, 2012).
TASK 2
P3: Calculation of cost using an appropriate technique
Cost: It is a valuation in terms of money for efforts, materials, resources, time consumed,
risks incurred and opportunity foregone in manufacture and delivery of product or services. Cost
is the total money which an organisation consume in producing the product. Oak Cash & Carry
Ltd set a favourable cost of its product so that it achieving maximum profits. It also identify the
right cost that retailers pay for its grocery at the time of purchase and that cost is satisfactory for
new as well as existing customers.
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Marginal costing: It is a costing approach where marginal cost is charged to per unit of
cost while the fixed cost for the period is entirely written off against the contribution. Marginal
cost is also known as variable cost which includes extra units cost of material, labour. It shows
the effects on profit of changes in output by distinguishing between fixed and marginal costs
(Järvenpää and Länsiluoto, 2016).
Absorption costing: It costing method identify the importance of standard costs involved
in production. Oak Cash and Carry Ltd uses this costing technique in identifying its
manufacturing costs that includes in production activities absorbed by sales of the similar
product.
Calculation of net profit by using marginal costing method:
Particulars Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600) 33000
Marginal Cost of goods sold: 9600
Production = (units produced * marginal cost per unit = 800 * 16) 12800
closing stock = (closing stock units * marginal cost per unit = 200 *
16) 3200
Contribution 23400
Fixed cost ( 3200 + 1200 + 1500 ) 5900
Net profit 17500
Computation of net income by using absorption costing method:
Particulars Amount
Sales = (selling price * no. of units sold = 55 * 600) 33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600) 14025
Gross profit 18975
Selling & Administrative expenses = (variable sales overhead * actual sales +
selling and administrative cost = 1 * 600 + 2700) 3300
Net profit/ operating income 15675
Break even analysis: It is point where company's total cost is equal to its revenue. It
assist Oak Cash and Carry Ltd in determining the state of no profit or loss. Here company's
opportunity costs have been paid and capital receive expected return.
A. Total number of product sold
Sales per unit 40
Variable costs VC = DM + DL 28
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Contribution 12
Fixed costs 6000
BEP in units 500
B. Calculation of breakeven point in accordance to sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution / sales * 100 30.00%
BEP in sales 20000
C. Calculation for getting desire profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety: It is a distinguish between actual sales and break even sales. It also
determines how much sales can fall before a company reaches to its BEP. Oak Cash and Carry
wants to project its margin of safety under a budget for a upcoming period (Jones and et. al.,
2012).
D. The margin of safety, if 800 products are sold
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5
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M2 Various types of accounting techniques
Standard, marginal and historical costing are the several accounting techniques that are
adopted by Oak Cash and Carry Ltd to determine its net operating income. These techniques are
explained below:
Standard costing: It is used by the managers of Oak Cash and Carry Ltd to determine
the differences between actual cost and budgeted cost. This technique show the deviation in
actual and standard cost.
Marginal costing: This technique is used to analyse extra cost which occurs when
company is producing additional units in production. It determines the opportunity cost that
arises when the quantity produced is increased by extra units (Jordan, Jørgensen and Mitterhofer,
2013).
Historical costing: It is the original cost on the asset, that is recorded in the financial
statements of the company. It can be easily verified by assessing the source acquired and trade
documents.
D2 Data interpretation
As per the above calculation, it is cleared that marginal costing technique is more
beneficial for Oak Cash and Carry Ltd as compare to absorption costing method. It is because it
shows more profit. While computing net profits by marginal costing technique it shows £17500
as profits and absorption costing techniques shows £15675 as profit. When break even point is
calculated, the total numbers of units sold are 500 and total BEP sales is £20000. If the company
want to earn minimum profit of £10000 then it have to sale 1333.33 units. Margin of safety is
37.5 when 800 units are sold by the company.
TASK 3
P4 Advantages and disadvantages of different planning tools used for budgetary control
Budgetary control is used to determine various results with the help of forecasted figures
of the company. It is a method that is implemented to control cost which includes preparation of
budgets, coordinating and distributing responsibilities to the departments, comparison of actual
and forecasted performance. It helps to maintain proper workforce that result to achieve
maximum profitability(Lee, Matsunaga and Park, 2012). Budgetary control process involve
various steps such as assigning responsibilities, preparing budget manual, forming budget
committee, setting budget period etc. Oak Cash and Carry Ltd. is a grocery wholesale company it
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uses three types of planning tools, Forecasting, contingency and scenario tools. These are
explained below:
Forecasting tools: It is a fundamental setup that is used to figure out the deals and
income chart of business. It is used by Oak Cash and Carry Ltd. to forecast internal and external
factors affecting its business, to plan active strategies that helps to grow the business and
increase the sales and profits. These tools are used to forecast future situations with the help of
past reports and current trends (Lindholm, Laine and Suomala, 2017).
Advantages Disadvantages
It helps to evaluate possible outcomes for the
company.
It provide valuable information to the company
for better decision making.
Not possible to forecast the accurate future.
The reports are generated with the help of these
tools are based on past events.
Contingency tools: These tools are used by Oak Cash and Carry Ltd to determine the
event or consequence that might happen in future. It is basically related to negative events and
help the company to be prepare fro that particular risk or uncertainty. These tools are used to
respond appropriately to the negative event that might happen.
Advantages Disadvantages
It help to minimize the loss or production by
estimating the uncertainty.
It helps the company to be ready in advance to
face any consequences in future.
If any risk doesn't occur then the money
invested for the plan is wasted.
The implementation of this process is very
complex for small companies like Oak
Cash and Carry Ltd.
Scenario tools: These tools are used by Oak Cash and Carry Ltd to evaluate the
effectiveness of strategies, plans and decisions that are taken by the management. These tools are
very effective and are used in strategic planning to make long term flexible plans to increase the
profit level of the organisation (Rieckhof, Bergmann and Guenther, 2015).
Advantages Disadvantages
It helps to to understand the possible
implications and benefits of different
It is not useful while making short term
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approaches.
These tools are very helpful for the
management to make good decisions.
decisions.
It requires controlled monitoring,
analysis and communication process.
M3 Uses and applications of planning tools for preparing and forecasting budgets
Oak Cash and Carry Ltd use three types of planning tools to prepare and forecast
budgets. Those planning tools are forecasting, contingency and scenario tools. These planning
tools are helpful in determining future risks and uncertainties. These tools provide various
information to the management to make appropriate decisions. It helps the managers to be
prepare for the events that might happen in future and reserve resources to deal with the same.
Management can make long term plan by using these tools and it will enhance the productivity
and increase profits for the company. It also help to reduce the production loss by estimating
possible events.
P5 Responses of management accounting system to deal with financial problems
Facing financial problems is a state, in which an organisation have to deal with money
related problems. These problems occur when an organisation is not able to properly maintain its
monetary resources. Oak Cash and Carry Ltd is facing various types of financial problems. The
problems are explained below:
Late payments by clients: The main financial problem that is faced by Oak Cash and
Carry Ltd is receiving late payments from debtors. If they don't make payments on time then
company will have to face the problem of lesser monetary resources to fulfil their requirements.
Late payments from clients will also create higher debts because if company is not having proper
finance then it has to buy goods on credit.
Improper money management system: Improper money management also creates
financial issues for Oak Cash and Carry Ltd. When the system is not properly maintained then it
cannot show the accurate financial reports and then managers are not able to get the exact
information of finance. Incorrect information of finance will guide the managers to take wrong
decision related to monetary resources (Spraakman, 2015).
Sudden expenses: It refers to those expense which are not planned by the managers and
suddenly occur. The managers of Oak Cash and Carry Ltd have to deal with such type of
problems and have to spend money. The managers have to use monetary resources for these
expenses and it create the deficiency of resources that converts to financial problem.
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