ESOFT HND Business: Management Accounting Report on Penguin Sportswear

This report provides a comprehensive overview of management accounting practices within Penguin Sportswear (PCT.) Ltd, a Sri Lankan exporter of sportswear. It begins with an introduction to the company, its vision, mission, and operational structure, including its manufacturing processes and key competitors. The report then differentiates between management accounting and financial accounting, highlighting the advantages and disadvantages of management accounting, such as improved decision-making, increased efficiency, and cost control. It delves into the current state of management accounting within Penguin Sportswear, identifying the absence of a formal system and the reliance on MS Excel. Furthermore, the report explores the principles of management accounting, including communication, relevance of information, stewardship, and impact analysis. Finally, it examines various types of management accounting systems, such as cost accounting, job costing, inventory management, and price optimizing systems, along with their respective benefits, and concludes with a discussion of different management accounting reports and their purpose in planning and decision-making.

ACKNOWLEDGEMENT
I would like to extend my gratitude towards everyone who helped me in completing this report
which is a part in HND in business management at ESOFT Metro Campus.
First and foremost, I would like to express my heart full of thanks to my parents who gave this
opportunity to start my higher education at ESOFT Metro Campus.
I would also like to give my heart full of thanks to my lecturer Miss Ruwani Ekanayake, who
supervised me in completing this report as she deserves the word of appreciation.
Thank you …
Sathsarani Gunasekara

Activity 01
Introduction to the penguin’s sportswear (pct.) Ltd
Penguin sportswear is a Sri Lankan exporter of quality products to the global market registered
with the Sri Lankan Export Development Board and it was founded in 1989. Penguin
sportswear is among Srilanka’s leading apparel manufacturers and caters to reputed retailers
across UK and Europe. In penguin sportswear they continuously strive to create value in their
business while constantly innovating their products and services. The pension sportswear is a
medium sized E-turf that manufactures sportswear. It has been registered as a private limited
company in 2010. It manufactures and sells its own brand of sportswear under 3 main
categories namely,
 Premium – High end brand for quality conscious customers
 Vantage –good quality brands with the medium price range
 Regular –Average quality brand with low price range
Apart from the head office, the company has three branches in key locations to manage all the
activities. The main competitor is the Lanka Sportswear.
Vision
“We CREATE value in our business
We make every attempt to INNOVATE our products and services
We strive to EXCEL with our people and processes
With the aspiration to DELIGHT our customers in every way”
Mission
“A great place to work that achieves operational excellence
while ensuring a high degree of social and environmental responsibility”
(Lanka, 2021)
Management Accounting
What is management accounting?

Management accounting is also known as managerial accounting and can be defined as a
process of providing information and financial resources to managers in making decisions.
Management accounting is only used by the organization's internal team, and this is the only
thing that differentiates it from financial accounting. (Topper-2021) In this process, the
financial information and reports, such as the invoice, the financial balance statement, is shared
by the financial administration with the company's management team. The goal of management
accounting is to use this statistical data and make a better and accurate decision, controlling the
company, business activities and development.
Management accountants work for public companies, private businesses, and government
agencies. Their duties include recording and beating numbers, selecting and managing
company investments, risk management, budgeting, planning, strategizing and decision
making.
Financial Accounting
Financial accounting is a specific branch of accounting that involves a process of recording,
summarizing, and reporting the large number of transactions resulting from business operations
over a period of time. (Will Kenton-2020) These transactions are summarized in the
preparation of financial statements, including the balance sheet, the income statement and the
cash flow statement, which record the operating performance of the company during a specified
period.
(Kenton, 2020)
The advantages and disadvantages of management accounting is explained below in
detailed;
Advantages
1. Better decision making: The management accounting helps in effective decision making for
an organization. It supplies all the required information in the form of charts and forecasts
to the management team. All this information enables managers in performing detailed
analysis and taking correct decisions.
2. Increase efficiency: The management accounting increases the efficiency of operation of the
company. Everything is done in management accounting with a scientific system for
evaluating and comparing the performance with this we find deviations, take promotional

decisions on this basis. Other employees will also be motivated with this because if their
performance will be favorable, they get reward of this. Thus, management accounting
increases the efficiency.
3. Maximizing the profitability: using the management accounting’s budgetary control and
capital budgeting tool, the company can easily succeed to reduce both the operating and
capital expenditures. After this, company can reduce its price and then company will
receive super profits.
4. Control business cash flow: it is one of the advantage of the management accounting that it
can be used for controlling of the business’s cash flow. We all know that cash in hand is
better than in fixed properties if there is any emergency to pay the loan or debt so, the
management accountant deeply studies from where the money is coming and where it is
going. To check on the misuse of money will surely control of the business cash flow.
The disadvantages
1. Personal bias: the accounting branch is subject to the personal bias and prejudices by the
management. The effectiveness of the management accounting may be affected by the
interpretation and analysis capability of individuals.
2. Lack of specific procedure: Management accounting does not have any specific rules and
principles to follow. In the absence of any guidelines, this branch of accounting may
provide inaccurate data.
3. Costly: the installation of a management accounting system requires huge expenses as they
need to hire a management accountant. such high costs cannot be bear by the small business
organization.
4. Provides only data : It only supplies data to the management but does not provide any plan
of action or decision .Management accounting cannot substitute the role of management and
can only help them in their role by providing the required data . (GOOGLE , n.d.)

How the management accounting process is working in
penguin sportswear?
The manufacturing set up was started in January 2011 with a small manufacturing plant but, the
production is multiplied over the years. There is no proper management accounting system in
penguin’s sportswear. The production Manager in charge of the accounting division of the
production unit is Mr. Roy Pereira. He has no background in management accounting and
complies all the management accounting records on MS EXCEL. The reports which has been
prepared do not reflect the exact cost of the manufactured products as they change significantly
every year.
The principles of management accounting
The principles of Management accounting are as follows;
 Communication provides insight that is influential
Objective: To drive better decisions about strategy and its execution at all levels
Management accounting begins and ends with conversation, which enhances decision
making ability .Good communication of critical information facilitates cross silos to
management accounting and facilitates integrated thinking .The consequences of actions
in one aspect of the business can be better understood in another area .The most relevant
information can be obtained and analyzed by discussing the requirements of the
decision makers .This means that the recommendations are useful to the decision
makers and can have an impact .When the right people have the right information at the
right time ,it takes a better place to get what they want which will drive long term value
generation .This is how the management accounting influences information based on
decision making. (ESOFT METRO CAMPUS , 2021)
 Information is relevant
Objective: to help the organization plan and source the information needed for creating strategy
and tactics for execution

The main role of management accounting is to make relevant information available to the
decision makers on a timely basis. Following communication principle, the decision at hand
and needs of the decision makers are known and understood. This principle therefore involves
in the identification, collection, validation etc. .as it requires achieving an appropriate balance
between the past, present and future related information’s.
 Stewardship builds and trust
Objective: To actively manage relationships and sources so that the financial and non-
financial assets, reputation, and value of the organization are protected.
As mentioned before, an effective management accounting function is one where
competent people apply the principles to their practice areas. people who consistently
adhere to good values and best practices become trusted guardians of an organizations
value.
 Impact on value is analyzed
Objective: To stimulate different scenarios that demonstrate the cause and effect relationships
between inputs and outputs.
The focus of the principle is on the interaction between management accounting and the
business model by modelling the impact of risks and opportunities, the effect on strategic
outcomes is quantified. This principle requires a thorough understanding of the business model
and the wider macro-economic environment .It involves in analyzing information along the
value generation path ,focus on the risks etc. (ESOFT METRO CAMPUS , 2021)
Different types of Management accounting systems
There are many types of management accounting systems namely,
 Cost Accounting systems

Cost accounting is concern with recording, classifying and summarizing costs for the
determination of costs of products or services, planning, controlling and reducing such costs
and furnishing of information to management for decision making. This method helps to
estimate and also takes into account the organization’s probability, inventory and cost control
process.
The objectives of cost accounting are cost reduction, estimation of costs, cost control and
providing basis for operating policy.
The benefits of cost accounting systems are as follows;
1. Classification and sub division controls
2. Control of materials, labor and overhead costs
3. Budgeting
4. Best use of limited resources
5. Expansion (ESOFT METRO CAMPUS , 2021)
 Job costing systems
This method assists in assigning production costs to each product in the business, thereby
enabling ordering costs. Job costing is a production cost method adopted by an enterprise that
offers a limited range of unique products. The benefits of job costing systems are as follows;
1. Profitability : The job costing systems allows you to assign costs separately to individual
operations and calculate the profit margin you ‘ll be getting on each job (ESOFT METRO
CAMPUS , 2021) .
2. Performance: a job order costing system also enables you to access the performance of
your employees, job costing provides sufficient information to help you to evaluate
individual performance data in terms of productivity, efficiency and cost control. With the
help of these tools you can identify the employees who fail to meet performance
expectations . (ESOFT METRO CAMPUS , 2021)
3. Accessibility : the system provides access to the expenses incurred on each job ,even during
the manufacturing process .This gives you the opportunity to check the costs one by one ,
identify all the items included ,and understand why they happened .based on your

findings ,you can develop specific strategies to control the costs better in future. (ESOFT
METRO CAMPUS , 2021)
4. Continue monitoring : job order costing allows you to monitor the production process
continuously ,giving you the enough time to identify the potential issues and making
corrections to avoid catastrophic situations, such as producing defective items or going
over budget even before the manufacturing process ends . (ESOFT METRO CAMPUS ,
2021)
 Inventory Management system
An inventory system is the combination of technology and processes and procedures
that oversee the monitoring and maintenance of stock, whether those products are raw
materials, company assets or finished products ready to be sent to vendors or end
consumers. The objectives of inventory management system are minimizing inventory
investment, provide an acceptable level of customer service and allow cost efficient
operations. The benefits of inventory management systems are as follows;
1. Schedule maintenance
2. Cut costs and increase profits
3. Keep order accurate planning
4. Know thyself (ESOFT METRO CAMPUS , 2021)
 Price optimizing systems
This system helps in controlling the price of the resources reeled to the company. This system
helps in making decisions in regard to the prices of different products at the same time. It will
also help in determine the levels of demand of products at changing the levels of prices. Hence,
this helps determining the structures of pricing in order to undertake the promotion pricing and
discounted pricing. The benefits of price optimizing systems are as follows;
1. Automation benefits
2. Speed of decision making
3. Direct financial benefits

4. Ensuring consistency (ESOFT METRO CAMPUS , 2021)
Different management accounting reports
Management accounting reports are also known as cost accounting reports. The purpose of the
management accounting reports is to help in planning, monitoring and determining decisions on
the way forward. The different types of accounting reports are mentioned below;
1. Cost reports : Managerial accounting calculates the costs of items produced .This is done
by taking all the raw products costs ,overhead ,labor and any additional costs into
consideration .The totals are divided by the amounts of the products which are
produced .All of this information’s are summarized in a cost report .This reports helps in
proper identification of the costs ,profits and the expenses in relation to Penguins
sportswear .Thus it provides indication of the aspect of the earnings in penguins sportswear
that is related with one particular product.
2. Order information report:
This provides the information in regard to the operations of penguin’s sportswear thus, it helps
in managing the operations of the company in order to reduce the ordering cost of the products.
3. Budgets: budgets are typically created by using the prior year’s budgets and adjusting to
future projections. A company’s budget list all the sources of revenue and expenses. It helps
in making plans for the company which is the penguins sportswear in order to analyze the
performance of the company and also helps in evaluating the performance of the
departments and cost controlling.
4. Performance report: this report helps in comparison of the actual performance with the
budgeted performance.

Activity 02
Apply a range of management accounting techniques and
produce appropriate financial reporting documents
Cost is the expenditure in monetary cost of purchasing various factors of production. The costs
can be classified based on the nature, based on the control and based on the they are as follows;
The costs which can be classified Based on the nature are as follows;
1. Fixed cost: This is the cost which does not change with the level of production.
2. Variable cost: This is the cost which changes with every level of production.
3. Overhead cost: This is a cost which is incurred for another expense of production.
4. marginal cost: This is a cost which is incurred by using one unit of production.
5. material cost: This is a cost which is incurred for the purchase of raw materials.
6. labor cost: This is the amount paid to the workers.
The costs which can be classified based on the basis of control
1. controllable costs
2. uncontrollable costs
The costs which can be classified based on the relevance to decision making
1. opportunity costs
2. real costs
3. sunk costs
4. imputed costs
5. conversion costs
calculate the costs using appropriate techniques of cost
analysis to prepare an income statement using marginal
and absorption costs
PENQUINS SPORTS WEAR LIMITED

INCOME STATEMENT
FOR THE SECOND MONTH
Sales (60,000 x 10)
(-) full production cost
Opening inventory (10000 x 7)
Direct material (2 x 50,000)
Direct labor (1.6 x 50,000)
Variable production overhead
(0.4 x 50,000)
Fixed production overhead (3 x
50,000)
(-) closing inventory
Gross profit
(-) non production overhead (1.5
x 60,000)
Fixed non production overhead
Net profit
70,000
100,000
80,000
20,000
150,000
(0)
90,000
40,000
600,000
(130,000)
50,000
0AR -, 150,000
50,000
= 3
Full production cost
Direct material - 2
Direct labor - 1.6

Variable production overhead - 0.4
Fixed production overhead - 3
7
MARGINAL COSTING SYSTEM
PENQUIN SPORTS WEAR LTD
INCOME STATEMENT
FOR THE SECOND MONTH
Sales (60,000 x 10)
(-) variable production cost
Opening inventory (10,000 x 4)
Direct material (50,000 x 2)
Direct labor (50,000 x 1.6)
Variable production overhead (0.4 x 5,000)
(-) closing inventory
Gross contribution
(-) variable non production overhead (1.5 x 60000)
Net contribution
(-) fixed cost
Fixed production overhead
Fixed non production overhead
40,000
100,000
80,000
20,000
(0)
(90,000)
150,000
40,000
600,000
(240,000)
360,000
(90,000)
270 ,000
(190,000)