White Elephant Restaurant: Management Accounting Systems Analysis

This report provides a comprehensive analysis of management accounting systems and reporting methods, specifically in the context of the White Elephant Restaurant. It begins by defining management accounting and outlining the essential requirements of various systems, including cost accounting, job costing, process accounting, and throughput accounting. The report then discusses different methods used for management accounting reporting, such as job cost reports, budget reports, and sales and profit reports, highlighting their importance in making informed business decisions. The analysis covers the advantages and disadvantages of each method, emphasizing the need for proper implementation to achieve optimal results in cost control and business performance improvement. The document concludes by underscoring the significance of these accounting tools in helping managers track performance, formulate strategies, and ultimately enhance profitability.

INTRODUCTION
Management accounting is one of the most important domains that assist firm in
managing cost in its business. In present research work management accounting concept is
defined clearly and requirements of varied systems are explained. In middle part of the report,
profit computation is done on basis of marginal costing and absorption costing approaches and
their suitability for business is identified. Along with this, merits and demerits of different
planning tools is explained in respect to budgetary control. At end of the report, varied methods
that can be used to respond to financial problems are explained. By covering all these things in
proper manner research work is completed.
P1 Management accounting and essential requirements of different management
accounting systems
From: Budgeting officer
To General manager of White elephant restaurant
Subject: Management accounting system
Management accounting refers to the tools and methods that are used for doing costing of
product and identifying lots of facts and figures in respect to costing of products and services.
Usually, in management accounting there are number of tools and methods like variance analysis
and budgeting that can be used for cost control and analysis (Burns. and Scapens, 2000). There
are number of advantage and disadvantage of these methods and due to this reason it is very
important to use all these methods in proper manner in appropriate manner so that best rules can
be obtained in the business. Management accounting systems are widely used by all sorts of
business firms. It is the system in which in systematic manner and in specific way transactions
related to specific product are recorded. There are varied sort of management accounting systems
and essential requirement of these accounting systems are explained below. Cost accounting systems: Cost accounting system is one of the most important systems
because under this all sort of expenses related to all products that are produced by the
firm are recorded collectively. All these expenses are aggregated to arrive at amount of
overall cost that is incurred in the business. White elephant restaurant can make use of his
accounting system because it simply need to sum all relevant expenses in category of

fixed, variable and semi variable expenses. By using this accounting system managers
can prudently make decisions. Under cost accounting systems all expenses are classified
into fixed expenses, variable expenses and semi variable expenses (Angelakis, Theriou
and Floropoulos, 2010). Fixed expense is the cost which remains stable and does not alter
during entire life of the project. It can be said that cost accounting system have due
importance for the firms because in it one can easily get segregation of expenses in
different categories. It can be observed that managers always required classification of
cost in all these categories because on basis of same they identify that to what extent
variable expenses increased in the business. Variable expenses are those expenses that
keep on fluctuating consistently in the business and never remain stable at specific point.
This reflects that there is huge difference between fixed and variable expenses in the
business. It is very important for the firm to maintain control on its expenses so that
profitability can be enhanced in the business. Cost accounting system is currently
employed by all range of enterprises in their business due to its unique and easy
implementation phase. This is the reason due to which cost accounting system is gaining
wide popularity among business firms. It can be said that there is huge importance of cost
accounting system for the business firms. Job cost system: Job costing is one of the unique methods of costing and under this for
each job or product line separately costing is done. For example there are 5 products then
in that case for each product separately costing will be done in the business (Figge and
Hahn, 2013). Under this accounting system aggregately costing of products is not done
and due to this reason this accounting system is considered better than other accounting
systems. This is because in other managers does not get an overview of product lines
separately but in case of job cost system for each product individually information is
obtained by the business firms. Thus, it can be said that there is huge importance of job
cost system for the business firms. This is because under this system management gets
report of costing of all products separately. On the basis of information obtained they
become able to identify that which of product lines is more profitable and expenses are
low. In other words it can be said that managers comes to know about products where
expenses are very high. It can be said that there is huge importance of job cost system for
the business firms. This accounting system is used in the firms that are operating

production plant and producing multiple sorts of products in the business (Lavia López
and Hiebl, 2014). On the basis of reporting system they get an entire detail about single
product specifically and decide that on which product they need to pay due attention. It
can be said that there is huge importance of job cost system for the business firms. Process accounting system: Process costing system is one of the important system and
under this for entire process costing is done separately. It can be seen that for each
product there is specific process that is followed for production of goods at workplace. In
this process there are different stages that are performed by the business firms in order to
produce specific product. For each product production stage separately costing is done.
This is one of the important costing systems that are followed by the business firm. This
is because under this more accurately overview of costing of product is obtained (van der
Steen, 2011). In the stage of production where cost is much high can be analyzed by
performing process reengineering stage and activities that are producing high amount of
wastage can be simplified so that cost can be reduced in the business. It can be said that
process costing system is one of the most important system that is used by the business
firm’s at large scale in the workplace. In current time period there are large numbers of
firms that are operating process costing system at workplace because it has number of
advantage for the firm. Hence, it is the attractive features of the process accounting
system that make it more popular among business firms. Throughput accounting system: It is one of the common accounting systems that come
in modern category. It is the accounting system which is newly prepared by the Israeli
business man so that wastage can be detected in the business and same can be removed. It
can be said that there is huge importance of throughput accounting system for the firms
because it lead to reduction in cost in the business along with decline in wastage in the
business.
P2 Different methods use for management accounting reporting
From: Budgeting officer
To General manager of White elephant restaurant
Subject: Management accounting reporting
Reporting is the one of the major task that is performed in every business. This is because in

reports lots of facts and figures are presented that are used by the managers for making business
decisions. These facts may be related to sales and revenue that are earned in the business. On the
basis of these facts managers comes to know about area where they need to work in order to
improve performance of the business firm (Kotas, 2014). Different sort of reporting are used by
the firms in their business and same are explained below. Job cost report: Job cost report is one under for each product separately report is
generated in the business. White elephant restaurant can use this sort of report so as to get
better overview of costing of all products separately. In the job cost report there are
different product lines that are operated by the business or different orders of customized
products that are received from customers are also treated as job. It can be said that there
is huge importance of job cost report for the business firms. From this report managers
get information about different sort of variable expenses that are made in the business.
Job cost report is prepared by most of business firms because it help them in making
relevant business decisions. In large size firms usually there are job cost system and due
to this reason job cost report is prepared in the business. Time to time on monthly basis or
within every 15 days job cost report is prepared. This is done because by doing so
managers keep close track of variable expenses in the business (DRURY, 2013). On
other hand, by preparing cost control strategy on initial stage expenses are control in the
business. This lead to strict control on expenses in the business. Overall due to reduction
in expenses in the business product cost decline and due to this reason firm earn good
amount of margin in its business on per unit sold. It can be said that this sort of reporting
greatly help managers in managing efficiency in the business. Hence, it can be said that
there are multiple reasons due to which it is assumed that there is wide level of benefits
of using job cost report in the business. Budget report: Budget report is also one of the important tools of reporting because in
this report standards are clearly communicated and actual facts are recorded in alignment
to it. On this basis it is identified whether firm perform good or bad in its business. Firm
performance is considered good when it successfully beat standard and considered worst
when it failed to beat standards. It can be said that it is one of the important tool of
reporting for the firms. On basis of variance analysis that is done in budget report it is
identified that which are areas where work need to be done in the business. For example

if variable expenses variance is negative then it can be said that variable expense is the
area where work need to be done in proper manner so that cost can be controlled in the
business. It can be said that budget report help Company in tracking its performance time
to time. There are different sort of budgets that are prepared by the firms like zero based
budgeting and incremental budgeting (Li and et.al., 2012). Both budgeting approaches
are totally different from each other. Budgeting methods does not affect budget report of
the business firms. It can be said that budget report help firms to measure their
performance in systematic way and due to this reason there is huge importance of budget
report for the firms. Sales and profit report: Sales report can be prepared by White elephant restaurant on
quarter basis and yearly basis. On basis of quarter results managers determine strategy on
which they need to work for next quarter. By doing so an attempt is made to improve
performance of business. It can be said that sales report not only help firm in measuring
its performance but it also help it in formulating business strategy so that performance
can be improved more for next time period. However, it is not necessary that firms
prepare sales report on quarter basis (Cuganesan, Dunford and Palmer, 2012). Mentioned
sort of report can be prepared on monthly basis or in every 15 days. It can be said that
there is great significance of sales report for the firms. On other hand, there is another
report which is known as profit report. Usually, sales and profit report is prepared
individually. This is because it is not necessary that if in respect to any product there is
high amount of sales then profit amount will also be high. It is possible that sales amount
will be high but profit amount may be low. Hence, managers often prefer to prepare sales
and profit report individually. There is another reason behind preparing this report and
one of them is that by obtaining profit report managers get information about level of
profit that is earned on product line which may be super normal profit or normal profit.
Managers often combine both reports and on that basis identify variable expenses due to
which low amount of profit is earned in the business. It can be said that sales and profit
report both have due advantage for the firms and both must be prepared time to time in
order to make business decisions in systematic manner in order to improve business
performance.

P3Marginal and absorption costing system in business
Figure 1Absorption costing method
Table 1Marginal costing method
Particulars Amount Amount
Sales 21000
Less: Cost of production 11200
Less: Cost of goods sold -1600
9600
Less: Over absorption of fixed expenses -100
Production cost of sale 9500
Gross profit 11500
Less: Variable overhead 600
Less: Fixed cost administration expenses 700

Selling cost 600 1900
Net profit 9600
In cost accounting there are two approaches of profit computation which are marginal and
absorption costing. In case of marginal costing approach variable expenses are only taken in to
account which means that fixed expenses are not considered for profit computation. Opposite to
this method of costing there is another approach of profit computation under which all sort of
expenses are taken in to account which are fixed expenses, variable expenses and semi variable
expenses. It must be noted that all these expenses are different from each other and they have
heavy impact on the firm profitability. Variable expenses are those expenses that keep on
fluctuating consistently and never remain stable at specific point of time (Cadez and Guilding,
2012). Fixed expenses are equal opposite of variable expenses because in this expenses remain
unchanged. Semi variable expenses are combination of fixed and variable expenses because
same remain fixed and its some portion remains variable in nature. In case of absorption
expenses both fixed and variable expenses values are taken in to account and from sales revenue
amount these expenses amount is deducted. By doing so profit amount is calculated in the
business. It can be observed that net profit in case of marginal costing method is 9600 and value
of same in case of absorption costing method is 9300. Comparison of both values is indicating
that huge amount of profit is earned in case of marginal costing then absorption costing method.
It can be seen from table which is given above that in case of marginal costing method cost of
production, cost of goods sold, production cost of sale are taken in to account. Apart from this,
variable overhead and fixed cost administration expenses are taken in to account.
It is clear that there is gap between marginal and absorption costing method. Firms can
choose either of these methods or can choose both approaches to compute profit in the business.
It will be better to use marginal costing method in the business because variable expenses are
only made in the business to produce goods and making available services to the customers.
Hence, if only variable expense is only taken in to consideration for calculation of profit then it
cannot be considered wrong. On other hand, there is logic behind using absorption costing
method in the business. It is well known fact that in absorption costing method both fixed and
variable expenses are taken in to account (Burritt and Schaltegger, 2010). Fixed expenses are
directly not related to production of specific number of unit but same support manufacturing of
goods at workplace. Hence, it is not completely possible to not include fixed expenses in costing

of product. Secondly, fixed expenses after all are cost to the firm and same can be covered by
sales revenue. Thus, from this point of view it can be said that it is very important to include
fixed expenses in profit computation. Firms have to choose whether they will use specific
method in profit computation or will use both approaches at same time to compute profit in the
business. It can be said that there is huge significance of both approaches for the firms because
same help them in making decisions in right direction. Firms must prepare both marginal and
absorption costing statements in their business so that they get an overview of entire profitability
(Englund and Gerdin, 2011). Means that if managers will compare profit when only variable
expenses are considered and when both sort of expense are taken in to account then in that case
they will come to know about exact impact that these expenses have on the firm profitability.
Accordingly, steps can be taken in to account to control expenses in the business. Thus, it can be
said that both marginal and absorption costing methods assist firms in formulation of strategy in
the business. Hence, both approaches must be used in the business so that prudent decisions can
be made in the business.
P4 Advantage and disadvantage of using different planning tools in the
budgetary control
Planning is the important function of management. For every business operation
performance planning need to be done in the business. It can be observed that it is the planning
that help firms in performing their operations in proper manner at workplace. Before planning it
is important to collect some of the important facts and figures in the business so that decisions
can be made in proper manner at workplace. Budgetary control is another term that is widely
used in the business. This term reflect control on the budget and making expenses within limit
that is determined in the budget. Different planning tools need to be used in the business because
by using same input can be obtained about areas where work need to be done in the business. It
can be said that there is huge importance of different planning tools that are used in the business.
Some of planning tools that can be used in respect to budgetary control are explained below. Variance analysis: It is the one of the widely used approach as under this method
standards are determined and against it real performance of the company is measured. On
basis of comparison it is determined whether firm performs good or bad in the business.

This method is used by all sorts of firms whether they are small or large in size because it
is very easy to make use of this method in the business (Quinn, 2014). Simply mangers
needs to determine standards on the basis of past data or forecast that is available to them
and need to compare actual with determined standard in order to measure firm
performance.
Merits
Variance analysis helps managers in measuring firm performance and identifying areas
where immediate action need to be taken to solve business problem.
Cost is controlled and efficiency level in business gets improved at fat rate.
Demerits
One of major demerit of variance analysis is that gap that is between actual and budgeted
values can be interpreted by every manager in different manager (Merchant, 2012). One
manager can say it moderate gap while other one may say it large gap. Hence, it is
difficult to determine intensity of action that need to be taken on basis of variance. Zero based budgeting: In this sort of budgeting initially no amount is allocated to any
department and manager for each department have to make projection about cash flows.
If top manager think that determined value is accurate then in that case budget is passed
from their side. Finally, all departments budget are added to develop final budget for the
firm.
Merits
One of main merit of zero based budgeting is that it is systematic approach of budgeting
and helps budgetary control in systematic manner because standards are determined by
considering multiple factors.
Other major benefit of zero based budgeting is that it enhances accuracy of manager in
terms of performance measurement.
Demerit
One of major demerit of zero based budgeting is that if department budgets are not
matching each other then same cannot be prepared in proper manner. For example
finance manager allocate less amount of budget but production manager allocate huge
amount budget then both will be contradict. If budget of both managers will be passed
then same will be prepared in wrong manner.

 Incremental budgeting: It is one of the most important type of budget because in this
previous year budget is considered and increment is made to past year values of
components (Angelakis, Theriou. and Floropoulos, 2010). This budget is gaining wide
popularity among people. Merit and demerit of incremental budget is given below.
Merit
One of major merit of incremental budget is that it is very easy to prepare mentioned sort
of budget as it can be prepared in very short duration by the business managers.
Demerit
One of major demerit of incremental budget is that it is not necessary that every year
sales revenue increased in the business. It is assumed that sales will increase and in
alignment to same expenses will also enhance. It is not necessary that always sales
revenue increased and on this basis it can be said that incremental budget sometimes may
carry out budgetary control in wrong direction.
P5 Adoption of management accounting system to respond to financial
problems
There are different sort of management accounting systems that can be used to respond to
financial problems. Financial problem may be related to less availability of cash in the business
or ineffective use of same in business. Different management accounting systems that can be
used to respond to financial problems are given below. Financial governance: It is one of the most important tools of management accounting
as under this system there are employees and their accountability is determined. In
proportion of accountability sufficient authority is given to them. In case any task is
performed in wrong manner then in that case there is any specific employee that can be
easily made responsible for non performance of task that is related to effective use of
cash in business in proper manner (Figge and Hahn, 2013). It can be said that financial
governance have due importance for the firms. KPI: KPI refers to the key performance indicators and under this standard in respect to
effective use of cash in business can be determined by using budget. In this way KPI can
be used to respond to financial problems.

 Capital budgeting tools: Capital budgeting tools can be used to evaluate project and
make proper decisions. On basis of capital budgeting it is determined that what will be
cash inflow amount. On this basis it can be determined that what amount of money need
to be borrowed from banks to meet financial needs so that effective use of cash can be
made in business according to requirements. Ratio analysis: Ratio analysis help managers in evaluating firm debt and equity mix. It
must be noted that debt and equity mix reflect a lot of things for the business firm. Debt
and equity mix reflect whether in the upcoming time period financial problem will
increased for the firm or will remain same. Apart from this, current ratio can also be used
to respond to financial problem because it reflect proportion of current assets to current
liability. In case current asset ratio is low then it means that firm is not able to pay current
liability on time. By using this ratio financial problem is detected at initial stage and steps
are taken on time to respond to financial problems.
CONCLUSION
On the basis of above discussion it is concluded that there are number of tools and
methods in the business that can be used to respond to financial problems. Hence, relevant tools
must be used to respond to financial problems. It is also deduced that both approaches to
compute profit are effective and according to need relevant method must be used in the business.
Apart from this, different sort of reporting must be used in the business so that performance of
the firm can be evaluated from different angles and steps can be take on time to improve
performance of company. Management accounting systems of different types are available and
they must be cautiously used by the firms at workplace.

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