Management Accounting Systems and Techniques: Oshodi Plc Case Study

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Management Accounting Systems and Technique
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Table of Contents
Introduction......................................................................................................................................3
LO1..................................................................................................................................................3
LO2..................................................................................................................................................3
LO3..................................................................................................................................................3
LO4..................................................................................................................................................3
Conclusion.......................................................................................................................................3
Reference List..................................................................................................................................3
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Introduction
The analysis of the happenings of the business to consideration the requirements of the enterprise
are known as management accounting. The business is evaluated with the help of estimates and
data. Therefore, the collaboration of accounting and management for assisting the company in
creation and execution of strategy of the organisation is known as management accounting
(Kaplan and Atkinson, 2015). Management accounting enables an organisation to take important
decisions and expertises an organisation in presenting the financial reports. In this research, a
close evaluation of the requirements of different types of management accounting would be
done. Moreover, the research would also focus on different methods of preparing the income
statement and analysis of the various tools of planning of accounting. Oshodi Plc is
manufacturing company that specialises in the manufacture of a fruit juice named JOJO. In this
study, the functions of the company like cost analysis and integration of the financial report and
techniques would be done to ascertain the profit maximisation activities of the company.
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LO1
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems.
Any organisation depends on its management for planning and forecasting data that helps the
enterprise to attain its objectives. The management of the company takes the help of the cost and
accounts to plan and forecast the activities of the business. Therefore, the process of evaluating,
classifying, recording and decoding the transactions of finance for providing aid to the
management of the company and other exterior parties of the enterprise such as customers,
creditors, bankers and shareholders who are apprehensive of the management and economic
affairs of the company is known as management accounting (Otley, 2016). There are different
techniques of management accounting that an enterprise follows. The company Oshodi Plc helps
the management in driving consistent success by applying different management accounting
techniques. They are:
Cost accounting system–The process applies to evaluate the price of their produced goods and
services for evaluating the valuation of the inventory and for evaluating their gains. Evaluating
the exact price of their product is important for the company to making the operations of the
company productive and profitable. The company Oshodi Plc uses everlasting inventory system
to provide the management with most accurate cost of their goods. Generally, the company
follows four different types of cost accounting system like lean accounting, activity based
accounting, marginal costing and activity based cost accounting to ascertain their cost of
products. The company uses this system of accounting to ascertain the amount of losses and
gains the company accounts for in the production and sales of one product. It defines different
part of costing in the production process such as variable overhead, fixed overhead, direct labour
and direct cost. The objective of the company in using such type of accounting is proper
presentation of data of cost to the management of the enterprise (Fleischman and Parker, 2017).
Job costing system – The method of ascertaining the cost the company incurs in performing a
specific cost is known as job costing system. In order to analyse the profit properly the company
needs to ascertain the cost of all the jobs that are performed in the company. While ascertaining
the cost of a job Oshodi Plc gets a detailed analysis of loss or profit on such jobs. Further, the
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company can stop practising or ascertaining the jobs that are not profitable or less profitable to
the company. In this process, the cost for specific job and specific quantity is ascertained. When
some specific job is performed to produce specific products for specific customers is known as
job costing order. Every job is comparatively of shorter duration as compared to contract job
costing (Uyar and Kuzey, 2016). These are evaluated on goods and services and not on
inventories.
Inventory management system–The supervision of stocked goods and non-capitalised assets
are known as inventory management system. Oshodi Plc keeps a systematic record of its existing
inventory and the ones, which the company has sold out to ascertain the proper profit and loss of
the business. The process of inventory management monitors the course of goods or items from
producers to warehouses and to the buyers from the warehouses. The decision regarding
economic order quantity is taken in regards of the information provided by inventory
management accounting. This system of accounting allows the company to prepare against
situations like inflation or any contingent possibilities (Maskellet al., 2017).
Price optimising system – The Company ascertains various demand recorded at different price
levels. Then attach those responses derived from ascertainment of demand to inventory levels
and costs to decide upon the best prices to maximise profits is known as price optimising system.
Moreover, Oshodi Plc also uses this method to analyse the efficiency of the prices that the
company has decided upon to derive profit from the sale of those products (Schuster, 2015). This
system of accounting helps the company in organising, planning, controlling and implementing
of the activities of business. The technique of price optimisation that Oshodi Plc uses is known
as price penetration and on some occasions, it uses the price skimming technique to control
wastages.
P2 Explain different methods used for management accounting reporting. (648)
The information relating to finances are assembled in a report and presented before the
management, such assembling of financial information of the company is known as management
accounting reporting. Income statement is one such form of management accounting reporting.
In this section, the reporting techniques adopted by Oshodi Plc would be analysed (Maas et al.,
2016).
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Variance report – Oshodi Plc forecasts the outcome of any specific period and good before
releasing the goods in the market. Variance report identifies and evaluates the difference between
the forecasted output and real output of the business. More specifically, it can be termed as the
difference between the profit earned by the company during a specific period and the budget of
that period and product. The report shows the company what should have happened and what has
happened during a specific time. The data of the actual output and the output of the budget are
assembled and structured in a spreadsheet and then the variance is evaluated in the separate
column of the spreadsheet. In addition to the figures, the variance report includes an explanation
for such variance. This report helps the business to ascertain the efficiency of their planned and
forecasted budget (Fuller et al., 2016).
Performance Report–The output of any activity is the product of performance report (Djakman
et al., 2016).A performance budget throws light upon the variance of budget of all products and
items of any concern. The reason for ascertaining the performance of budget variance on the
evaluating meter is that flexible budget is used for preparing the real budget and the forecasted
budget. The daily activities of the company and the employees of the concern are evaluated and
reported in performance report. In case of any variance, Oshodi Plc takes the necessary steps to
plan and adopt methods to eradicate the difference in the performance report.
Department Report – Oshodi Plc has different departments. The activities of the company are
divided among the different departments of the company. All the departments are ascertained
with particular amount of funds and items to proceed with their specified activity. The
departmental reports have the summary of such information regarding the activity and funds
allocated to them. In addition to these, it also has the outcome of the activities carried out by
different departments of the company. The company uses this report to evaluate and ascertain the
performance of each department of the company. The company uses this report to improve the
performance of the departments. Moreover, the company ascertains whether the planning process
of the enterprise is rendering profit or causing any kind of loss to the company. The close
evaluation of the departmental report allows the company to take steps for improvement of the
activities of the department and for enhancement of the activities of the enterprise leading to
maximisation of profits (Grisard and Annisette, 2018, July).
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Accounts receivables ageing report – Oshodi Plc lists out the unused credit and unpaid
customer invoices in the accounts receivable aging report with the help of data ranges. The
company uses this primary tool to ascertain and assemble the invoices that are due for payment
for a specific period and product. The report contains the information of contact of each
customer by the side of overdue bills so that they can be contacted to realise the due amount. It
has four columns dividing the customers as per their date of overdue. The columns are as 30 days
or less overdue, 31 – 60 days overdue, 61 – 90 days overdue. An additional column contains all
older bills and invoices that has not been realised from a long time. This report allows the
company to evaluate the bad debts and even the potential bad debts also the good debtors on
whom the company can rely and can continue to do the business on credit (Grisard and
Annisette, 2018)
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LO2
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs
Profit & Loss statement prepared for Oshodi Plc for the month of November and
December 2018
Particulars November December
£ £ £ £
Net sales 500,000 600,000
(-) Cost of sales
Opening Stock Nil Nil
Costs of production
Direct Material Cost 216,000 180000
Direct Wages 48,000 40000
Variable production overhead 36,000 30000
Fixed production overhead 99,000 99,000
Fixed selling overhead 14,000 14,000
Fixed administration overhead 26,000 26,000
Total COP 439,000 389,000
Variable selling overhead 50,000 60,000
Total Cost of sales 489,000 449,000
Net profit earned during the month 11,000 151,000
Table 1: Showing income statement under absorption cost technique
(Source: created by learner)
Profit & Loss statement prepared for Oshodi Plc for the month of November and
December 2018
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Particulars November December
£ £ £ £
Net sales 500,000 600,000
(-) Cost of sales
Opening Stock Nil Nil
Costs of production
Direct Material Cost 216,000 180000
Direct Wages 48,000 40000
Total COP 264,000 220,000
Marginal cost of goods sold 264,000 220,000
Contribution 236,000 380,000
(-) Fixed overhead expenditure
Variable production overhead 36,000 30000
Fixed production overhead 99,000 99,000
Fixed selling overhead 14,000 14,000
Fixed administration overhead 26,000 26,000
Variable selling overhead 50,000 225,000 60,000 229000
Net profit earned during the year 11,000 151,000
Table 2: Showing income statement under marginal cost technique
(Source: created by learner)
Oshodi Plc produces £ 12000 in the month of November and sales 10000 units in the same
month so the remaining stock is carried over to the next month. In the month of December 10000
units are produced and 12000 units are sold. At the end of the year 2018, the company has no
closing stock. The apportionment of profit under the marginal cost technique and absorption cost
technique is the same. There is no over or under absorption of cost or profit at the end of the
month or the year due to absence of closing stock. Therefore, the company can follow any of
these two methods to apportion the cost of sales and to allocate the profits at the end of each
year.
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LO3
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control. (633)
The process through which the managers of the company establishes performance and financial
goals with budgets, contrasts the real results with budgeted report and makes necessary
adjustments to maximise profits is known as budgetary control. In the budgetary control, the
management uses the budget that is prepared at the beginning of the accounting year and
compares it to the actual results of the company to evaluate the profit or loss. Based on this
comparison the company either adopts new techniques or tools to perform the business or make
necessary changes in the system. This establishment of control is known as budgetary control.
Oshodi Plc uses different tools of budgetary control to evaluate their performance and as a
planning tool. The company to plan and forecast the budget for the purpose of future decision-
making uses the budgetary control. The advantages and disadvantages of different planning
techniques of budgetary control are as follows:
Financial Budget
The ways through which Oshodi Plc plans the ways it would be spending the cash it is expecting
in near future is known as financial budget (Ong’ayo Francis and Adams, 2018). Sales of assets
and issuance of stocks are the sources of cash in the enterprise. On the contrary, the enterprise
uses the cash paying the daily expenses, payment of dividends and purchase of cash. The
financial budgets are of three types of capital expenditure budget, balance sheet budget and cash
budget. The advantages of this technique are:
1. The company by preparing financial budget makes itself aware of the available cash that it has
to spend and the amount it would be earning in the due course.
2. This helps the company to keep in store the required amount of cash for future and contingent
purposes (Ong’ayo Francis and Adams, 2018).
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3. Therefore, the business has appropriate amount of available cash to seize the exciting
opportunities that can help it maximise sufficient profit.
The disadvantages of financial budget are as follows:
1. The process of financial budgeting is performed by analysing the figures of the previous years.
Therefore, it is a time consuming process.
2. The process of budgeting is performed by the officials belonging to the top level of the
management of the company. They have to be paid more for this purpose and this makes the
preparation of financial budget a very costly process (Ong’ayo Francis and Adams, 2018).
3. Financial budget lacks flexibility. Therefore, it cannot be implied upon in case of sudden
happenings or accidents.
Operating Budget
The tool of planning Oshodi Plc uses to meet the obligation of debts of the company and to help
the company to grow consistently is known as operating budget. There three types of operating
budget known as project, expense and sales budget, that a company uses to implement control
over the activities of the organisation (Schmidgall and Kim, 2018).
The advantages of operating budget are as follows:
1. The operating budget helps a company to operate its daily activities by apportioning money to
the short-term requirements of the company. Once an operating budget is prepared it helps a
company to tailor the requirement of 3 quarters of a financial year.
2. The preparation of operating budget makes a company to perform its activities more
efficiently. In order to maximise profit and minimum cost the company must prepare operating
budget.
3. It helps the company to keep a detailed record of all incomes and expenses of the company.
Thus, a company can take the help of the track - records for decision-making (Schmidgall and
Kim, 2018).
The disadvantages of this planning technique are as follows:
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The operating budget depends entirely on the financial output. It does not take into account the
other aspects of manufacturing in its calculation.
2. A business enterprise operating on small scale cannot afford the cost of preparing the
operating budget.
3. Operating budget cannot be prepared unless the company hires an expert staff that specialises
in the preparation of budget (Schmidgall and Kim, 2018).
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