Principles and Practice of Management Accounting Report - Unit 5

This report analyzes management accounting principles, focusing on the case study of Alpha Ltd, a medium-sized pizza company. It explores different management accounting systems, including job costing, cost accounting, inventory management, and price optimization. The report delves into various management accounting reporting methods such as budget reports, performance reports, sales reports, and job cost reports. It also examines the application and benefits of these systems. Furthermore, the report compares and contrasts marginal and absorption costing techniques, providing income statements and reconciliation statements for each. It also investigates budgetary planning tools and their advantages and disadvantages. Finally, it compares how management accounting is used by organizations to respond to financial statements, providing a comprehensive understanding of the subject.

PRINCIPLES AND PRACTICE
OF MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Management accounting and requirement of different types of management accounting
systems.........................................................................................................................................1
P2 Different methods used for management accounting reporting.............................................1
Benefits and application of management accounting system......................................................2
LO2..................................................................................................................................................2
P3 Calculating costs under different management accounting techniques..................................2
LO3..................................................................................................................................................7
P4 Advantages and disadvantages of different types of budgetary planning tools......................7
LO4................................................................................................................................................10
P5 Comparing how management accounting is used by organisations for responding to
financial statements. ..................................................................................................................10
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting implies for the presentation of accounting information which in
turn aid in the formulation of management policies that associated with daily activities. In the
context of business unit, management accounting is highly significant as it helps facilitates
planning, co-ordination and financial control to a great extent. By employing this firm can do
effectual evaluation of efficiency and effectiveness of different policies. Along with this, with
the help of management team can do proper forecast about future and thereby would become
able to make optimum use of monetary resources. This report is based on the case scenario of
medium sized organization namely Alpha Ltd which in turn involved in offering pizza to all age
groups. In this, report will furnish information about the essential requirements of varied
management accounting systems that available to the firm. Besides this, it will also shed light on
the extent to which reports aid in managerial decision making.
Report will also develop understanding about the concept of costing methods in relation
to absorption and marginal. Further, report also entails how effectual planning can be done in
monetary terms by referring management accounting tools. It will also provide deeper insight
about the techniques which assist in addressing financial problems prominently. The present
report will be providing the understanding about the requirements of different type of
management accounting systems. It will be providing information about the different methods
that are use in management accounting and reporting. It will also provide for different techniques
under which income statements are prepared by the organisation. Report will also provide for
the tools that are used in management accounting. It will be giving detailed understanding about
the management accounting.
LO1
P1 Management accounting and requirement of different types of management accounting
systems.
Management accounting places emphasis on analysing and evaluating business
transactions which in turn contributes in business decision making. There are several tools which
can be employed by Alpha Ltd for ensuring smooth functioning of the business operations and
functions. Management accounting refers to the process of making management accounts and
reports for providing timely and accurately financial as well as statistical information’s to
managers for making decisions for the business. The accounting is used by organisations to
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identify, measure, analyse, and interpret and to communicate information for enabling the
organisation to achieve their desired objectives. The accounting is different from that of the
financials accounting. Financial accounting is for internal users and external users for making
decisions (Management Accounting, 2019). Management accounting provides information for
internal management of the company for framing strategies that would be enhancing the
performance of company (Nielsen, Mitchell and Nørreklit, 2015). Management accounting helps
the organisations to forecast about the future.
By doing assessment, it has identified that significant difference takes place between
management and financial accounting in the following manner:
Basis of difference Management accounting Financial accounting
Meaning It furnishes appropriate
information to the managers
which can be used for the
purpose of developing plans,
policies and strategies.
It focuses on the preparation
of final accounts with the
motive serve suitable
information to the relevant
parties.
Objective The main motive to assists
manager in decision making
by providing useful
information about internal
matters.
Company’s motive is to serve
information to the outsiders.
Time period As per the needs managerial
accounting reports are drafted.
Accounts are prepared at the
end of financial year.
Users or stakeholders Only internal parties Both internal (management,
employees and external
(investors, government etc.)
parties s
Format No specific format is followed Financial reports are prepared
by using the format mentioned
in IFRS
Compliance requirement in
relation to publishing and
No Yes
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auditing
Specifically, there are four MA systems which Alpha Ltd can use such as:
Job costing system
In the context of manufacturing organizations, job costing system is highly significant as
it helps in assessing cost associated with each job. Thus, by undertaking this performance of each
job can be tracked easily.
Advantages Disadvantages
 Facilitates identification of profitability
that associated with each job
 Helps in estimating the cost of similar
jobs
 Increases clerical work
 Costs are assessed on historical basis
Cost accounting system
By using this framework Alpha Ltd can do estimation about cost of its products or
services. By adding direct and indirect expenses (fixed as well as variable) cost related to
production can be determined. Thus, by adding mark-up in unit cost price can be determined
effectually.
Unit cost: Direct + indirect expense / number of units produced
Price = unit cost + (unit cost * mark-up%)
Advantages Disadvantages
 Helps in reducing cost level and
maximizes profitability
 Facilitates price fixation and gives
input for cost control (Advantages of
Cost Accounting, 2019)
 Assists in taking decision whether
company should make or buy
 It focuses on previous aspects whereas
management is taking decision about
future
 This system leads problems pertaining
to over or under absorption of overhead
(Advantages and Disadvantages of Cost
Accounting, 2019)
Inventory management system
With regard to Alpha Ltd it is highly significant which ensures effective management of
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raw material and finished product. Hence, by undertaking EOQ, JIT system etc firm can
determine the level to which inventory need to be maintained within an organization. Along with
this, by taking into account LIFO, FIFO etc business unit ensure prominent management of stock
within an organization.
Advantages Disadvantages
 Ensures uninterrupted production
activity within an organization
 Facilitates savings in terms of time and
cost
 Dependency on internet usage limits its
significance: System crash, malicious
hack
 Reduction in the activity of physical
audit (Advantages & Disadvantages of
a Computerized Inventory Management
System, 2019)
Price optimization system
This software can be undertaken by the firm for assessing prices which will improve
profitability aspect in the near future. Moreover, it clearly shows prices that customers are ready
to pay for the company’s product’s or services. Thus, by setting suitable price company can
increase customer base and thereby profitability as well.
Advantages Disadvantages
 Helps in taking appropriate pricing
decisions
 Assists in building competitive edge
 Time consuming exercise
 High dependency on internet access
P2 Management accounting report methods
The different reporting method for accounting of management includes different types of
reports which are formulated for organization in order to manage the information relating to
company (Mata, Fialho and Eugénio, 2018). This reporting is very necessary because of the fact
that this records all the information in a systematic and clear manner which helps the manager in
taking effective decision. Thus, it is very necessary for Alpha Ltd to use these various kinds of
reporting system which are illustrated in connected points-
Report for budget- this is a type of managerial reporting under which the budget for the
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company is prepared. The budget is defined as the estimate of the income and expenses based on
the previous budgets. This is very helpful for the company in analysing the expenses which can
be incurred in future and for this the company take measures for solving this in advance. Also,
this will help the manager in analysing the areas where they can cut the cost and where to
improve the income sources.
Performance report- this is yet another type of performance report which can be
prepared in Alpha Ltd under which the performance of the employees is recorded. Current
discussion helps the manager in evaluting the performance of the employees as well as the
business. Thus, this helps the manager in deciding that who are better employees and how they
need to be retained within the company. Thus, assist business in analysing and making ways of
improvising working ability of the employees and the overall performance of the company.
Sales report- this is a kind of format which is prepared by Alpha Ltd under which all the
sales transactions are being recorded. This helps the management of the organization in
analysing the sources of revenues and how much revenue is calculated with this source. This is
necessary because this helps the manager in deciding that whether the sales revenue is enough
for the working of company are they have to invest in other sources as well.
Job cost report- this is a type of reporting under which all the expenses which are which
are incurred for a specific project are recorded. Also, the estimation of revenue is done from this
project in order to evaluate the profitability of the project (Commerford, Hatfield and Houston,
2018). This job costing report help the company in identifying and analysing the higher earning
areas of the business. This report is prepared with the motive of analysing the good project so
that time and money is not wasted on the projects which are of low profit margins.
Benefits and application of management accounting system
The management accounting is very beneficial for the company as this helps the
company in analysing and interpreting the financial information and then taking decision and
making policies and plans to manage the business. The management accounting system are
applied in business in order to record different transaction of business, plan and control and take
decisions and formulate different policies for the betterment of the company.
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LO2
P3 Calculating costs under different management accounting techniques.
Problem 1
Calculating Profits as per different costing techniques
Marginal Costing
Marginal Costing is a costing technique used by organisations that charges the variable
cost to the cost units and fixed costs are attribute as the period cost. Fixed are charges against the
contribution of the period. This costing is ascertainment of the marginal costs and effect on
profits of change in volumes or types by differentiating between the variable and fixed costs
(Senftlechner and Hiebl, 2015).
Income Statement as per Marginal Costing
April May June July August September
£'000 £'000 £'000 £'000 £'000 £'000
Sales 600 480 720 600 560 640
Opening Inventory 0 0 45 0 0 45
Add:Production
Cost(Variable
Only) 225 225 225 225 225 225
Less:Closing
Inventory 0 -45 0 0 -45 -15
Marginal Cost of
Sales 225 180 270 225 210 240
Contribution
Margin 375 300 450 375 350 400
Less
Fixed
Manufacturing
Cost -150 -150 -150 -150 -150 -150
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Non
Manufacturing
Cost -50 -50 -50 -50 -50 -50
Net Profit 175 100 250 175 150 200
Absorption Costing
Absorption Costing is the techniques used for accumulating costs associated with the
production process and than apportioning them over the individual products. In absorption
costing fixed cost that are associated with manufacturing are allocated to the product cost. Fixed
cost are not charged against contributor as like in marginal costing (Absorptions Costing, 2019).
Income Statement as per Absorption Costing
April May June July August September
£'000 £'000 £'000 £'000 £'000 £'000
Sales 600 480 720 600 560 640
Opng Inventory 0 0 75 0 0 75
Add:Prod
Cost(Variable
+FC) 375 375 375 375 425 350
Less:Clsng
Inventory 0 -75 0 0 -75 -25
Over/Under
recovery of Fix
O/H 0 0 0 0 -20 10
Cost of Sales 375 300 450 375 330 410
Gross Profit/Loss 225 180 270 225 230 230
Non Mnfctrng Cost -50 -50 -50 -50 -50 -50
Net Profit 175 130 220 175 180 180
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2.Schedule for reconciling the net operating profit of under variable and absorption costing
Reconciliation Statement
Reconciliation Statement
April May June July August
Septembe
r
Profit as per
Absorption
costing 175 130 220 175 180 180
+ op stk @ FOH
rate at op. date 30 30
- Cl stk @ FOH
rate at cl. date 0 30 0 0 30 10
Profit as per
marginal
costing 175.00 100.00 250.00 175.00 150.00 200.00
Problem 2
A. BEP in units and in GBP
B. Contribution Margin Ratio
Calculating contribution margin ratio in case of new installation of
machine
Fixed cost 180000
Contribution per unit 12
Break even point (in
units)
Fixed cost/ contribution
per unit 15000
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Fixed cost 180000
Contribution margin 162000
BEP (in revenues)
Fixed cost/ Contribution
margin ] 111.11%
Total revenue 540000
Variable cost 378000
Contribution margin
ratio
Total revenue- variable
cost/ Total revenue 30.00%
2 b. Calculating contribution margin ratio in case of new installation of machine
In case of new machine is installed
Fixed cost 416000
Contribution per unit 26
Break even point (in
units) Fixed cost/ contribution per unit 16000
Fixed cost 416000
Contribution margin
BEP (in revenues) Fixed cost/ Contribution margin ]
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Total revenue 540000
Variable cost 189000
Contribution margin
ratio
Total revenue- variable cost/ Total
revenue 65.00%
2.c Company expects a sale of 20,000 units for the next month.
In case company expects for selling 20000 units for next month
Revised profit @ sales of 20000 units
Sales 20000*40 800000
Less: Variable cost 20000*28 560000
Contribution 240000
less: fixed cost 180000
profits 60000
Income statement in case of machine installed and not installed
Revised profits in case of installation
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