Management Accounting Techniques and Reporting for TMA Engineering Ltd

This report provides a detailed analysis of management accounting techniques, focusing on their application within a small business context (TMA Engineering Ltd.). It begins with an introduction to management accounting and its various types, including lean accounting, traditional systems, and transfer pricing. The report then delves into different management accounting reporting methods, such as performance reports, job costing reports, variable analysis reports, and budgets, including traditional costing. The core of the report compares marginal and absorption costing through income statements, highlighting their impact on profitability. Furthermore, it explores planning tools used for budgetary control, discussing their advantages and limitations. Finally, the report examines how organizations adapt management accounting systems to address financial problems, followed by a conclusion summarizing the key findings and a list of references. The report emphasizes cost-effectiveness, financial reporting, and the importance of adapting to financial challenges.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1...........................................................................................................................................3
P1 Management accounting and its different types....................................................................3
P2 Different methods for management accounting reporting....................................................5
P3 Income statement of marginal and absorption costing..........................................................7
TASK 3..........................................................................................................................................10
P4 Different types of planning tools used for budgetary control with their advantages and
limitations..................................................................................................................................10
TASK 4..........................................................................................................................................13
P5 Compare how organisations are adapting management accounting systems to respond to
financial problem......................................................................................................................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting plays vital role in planning and organising the available
financial resources and find out the effective business action to ensure the profitability of the
concern. Therefore, according to American Accounting Association, management accounting is
the effective process to choose best option among the various alternatives available, in the light
of their feasibility and profitability in near future (Ahadiat, 2013). This method helps to interpret
and evaluate the pre and post effects of the projects undertaken through various management
accounting techniques like Annual rate of return method, net present value method or various
budgetary control techniques based on the nature of the project need to be evaluated. In the
present report T.M.A engineering Ltd. is the small business venture with 25 employees and
turnover less than 500000 Pounds is planning to take effective management accounting
techniques like absorption costing, marginal costing or cost volume profit analysis to improve its
cost effectiveness and ensuring better presentation of its accounting reports for its stakeholders.
This report explains various types of management accounting systems wit their benefits and
limitations. Moreover, it signifies the merits and demerits of various budgetary control
techniques. An income statement is also prepared to compare the marginal and absorption
techniques and their effectiveness to improve the performance of the organisation (Albelda,
2011).
TASK 1
P1 Management accounting and its different types
Management accounting is an appropriate method of analysing overall financial
statement which act as a effective tool while estimating the future capital. It is a process to
analyse the results of the goals which was previously planned and find out the reasons of the
variances achieved. Variance means the difference between the standards maintained and the
actual results obtained. Management accounting is the effective process to calculate the
difference occurred and analyse the reason behind, which might be happened due to the internal
inefficiency or external challenges as well as it provides impressive suggestions to remove all the
obstacles and inefficiencies. This process don't have any fixed norms to be followed thus, its
presentation and analysis is based upon the nature and size of the organisation.
Management accounting divided into different parts-

 Lean accounting – According to this accounting system first priority is given to
formulation of various effective strategies which will be very supportive in reducing the
cost. The main reason behind reducing cost is to remove the level of wastage which
might be arises in manufacturing process. In fact there are many more cost which
occurred during producing goods which must be eliminated from this process and to
achieve this accurate information or evidences is required with the help of this system.
Accurate data is very much indispensable to control extra and unused cost or expenditure.
 Traditional management accounting system- It is also known as conventional method
which was used earlier by financial accounting system to manage overall enterprise
budget or control cost with the help of various techniques. In fact job order costing or
process costing is included in this method to track various other cost. Basically job
costing method is used when there is a presence of individual allocation whereas process
costing is used or needed in case of many process exist in a production of product. Apart
from this traditional methods was applied by previous companies because it consider as
previous tools.
 Transfer pricing- In this accounting system pricing strategy is mainly based on
movement in existing goods which occurs while manufacturing products by different
departments. In fact two important or indispensable cost which included in this
accounting system are variable cost and opportunity cost. Therefore cost increases due to
the increase in production of units which influence the price of product.
 Job Costing: Job costing is the method in which cost and expenses of any project are
charged on job rather than process. This method is used by the large manufacturing
companies who has the time limit to complete their orders on time and satisfy the high
demands in market otherwise the order could be replaced by the other competitor in the
market. This method is also used by the organisation who cannot invest high in the
expensive machines and equipments to produce high quality products as per the demands
of its customers in the market, so they join hands with the other job providers who have
the effective machines to produce the quality products.
Apart from this management accounting is very helpful and useful in reducing the extra
and unused cost of an enterprise to maximize their profits by minimizing their losses with the

help of impressive methods. In additional finance system plays a very eminent role in hedging or
controlling business risk or challenges. On the other hand it also helpful in estimating future cost.
P2 Different methods for management accounting reporting
Most of the enterprise try to prepare their own financial statements by considering
essential factors apart from nominal one. In fact report of management accounting is very helpful
in monitoring the company overall performance with the help of various reports for example-
 Performance reports - In this report an enterprise can mentioned the actual role of an
individual towards their organization. In fact performance report is consist of
measurement of presentation of employees with the help of sufficient capital. To prepare
this report it is very indispensable to collect accurate data and information of employees
performance. Apart from this financial report needs to consider quantitative research
technique to acquire data for preparing impressive reports with the help of various
measurement techniques. Therefore performance must be evaluated by considering this
report of candidates as well as mangers try to overcome the obstacles to improve the
whole performance of a organization. The main motive of this report is to provide
reliable or authentic information about performance of employees.
 Job costing reports- It consist of various cost as well as revenues of an enterprise which
is very helpful in decision making process of budgetary system. In fact it consist of
overall production cost which occurs while manufacturing innovative products. Basically
costing of job is recorded in a ledger accounts over the life or batch after that it
summarized in final trial balance before making of a job costing report or manufacturing
statement. Apart from this it is process of identifying the raw materials and labour cost of
specific job in proper systematic manner after that they use effective or accurate data or
information to create a punctuation for the clients. Therefore it is adopted by every
company to record their whole cost in a single statement which plays a very eminent role
in decision making process.
 Variable analysis reports- While manufacturing a product or running any business there
is a occurrence of many more cost from which there is also presence of variable cost
which always fluctuate due to the change in a production unit. In fact variable analysis is
a report consist of records of all the other cost which always changes due to increase in

unit of production. Therefore variable costing is mainly depend upon various other cost
which might be occurred while producing creative goods to attract millions of customers.
Apart from this, preparation of variable report is helpful in analysing the other cost.
 Budgets- One of the major or indispensable part of financial accounting because it
describes the overall cost of an enterprise and helpful in estimating the future cost. To
prepare the budget of a company it is very important to consider all the past and present
facts or figures as well as details of an organization. It is not easy to prepare an effective
or impressive budget for whole department because it requires to gather accurate data and
information to maximize their profit by minimizing losses. The main motive of budget
report is to describe the actual usage of overall capital while running a particular business
by satisfying the needs and wants of a whole society or customers. Apart from this it
covers all the activities or task which are need to be achieved by the organization for
attainment of their goals and objectives.
 Traditional Costing: Traditional costing is method to allocate the direct cost associated
with the product, labour and material to the cost of the product. Thus it is the method to
calculate the cost of the product with the help of a cost driver which signifies the basic
factor, constitutes the cost such as machine hours, direct labour hours and direct material
hours. It is the method to assign the manufacturing overhead to the units produced. One
of the basic advantage of the traditional costing is that it follows GAAP i.e. Generally
Accepted Accounting principles so it is common and easy implemented method. This
technique is common in small business enterprise like T.M.A Engineering Ltd. But with
the change in technological development and emerging of the computer world this
process is now outdated
 Inventory control reports- Its all about controlling or regulating of stock in a proper
manner because it plays a very vital role in production process. In fact it is very helpful in
securing raw materials of a company by utilising all the resources appropriately. There
are many more reason behind preparation of inventory report and these are-
1. Preventing an enterprise from extra and unused wastage.
2. Helpful in removing inventory barriers or obstacles.
3. Useful in protecting stock or raw materials from any harmful effect or damages.
4. Store inventory stock for future.

Apart from this inventory control report covers all the necessary stock and helpful in protecting
products from wastage or damages.
P3 Income statement of marginal and absorption costing
An income statement reflects the company's financial performance within specific
accounting period. It includes all the revenues and expenses of entity generated through all the
operating and non- operating activities. It facilitates the shareholders to decide whether to invest
in the company or not as per the profitability shown in the income statement. These statements
reflects the sustainability of the entity and helps the investors and financiers to ensure that the
money invested by them will generate sufficient returns (Lukka, 2010). This also enables the
comparison of the entity with the other competitors in the same sector to understand the strength,
weakness, opportunities and threats of the organisation in the market and take effective steps to
sustain in the long run. Income statement can be prepared on the basis of marginal costing or
absorption costing as mentioned below :
Income statement under marginal costing method
Particulars Amount (in £) Amount (in £)
Sales 21000
Less: Cost of goods sold 6600
Gross profit 14400
Less: Variable Expenses
Variable production overheads 1200
Variable sales overheads.2 E 600
Total variable expenses 1800
Net profit £12600

Income statement on the basis of absorption costing method
Particulars Amount (in £) Amount (in £)
Sales 21000
Less: Cost of goods sold 6600
Gross profit 14400
Less: Variable Expenses
Variable production overheads 1200
Variable sales overheads 600
Total variable expenses 1800
Less: Fixed Expenses
Production overhead 2000
Administrative cost 700
Selling cost 600
Total fixed expenses 3300
Total expenses 5100
Net profit £9300
It can be analysed from the above income statements that company is generating better
net profits at the end of the month. The amount of net profit calculated under marginal and
absorption varies i.e. net profit earned on the basis of marginal costing method amounts to
£12600 which is higher as compared to net profit under absorption which amount to £9300. This
difference arises mainly due to different costs that are taken into account under both these
methods. Moreover, in the context of expenditures, it can be interpreted that expenses under

absorption are more i.e. £5100 because it considers both fixed costs and variable costs. Whereas,
expenses as per marginal amounts to £1800 which is quite less because only variable
expenditures are considered in this method.
Generally, most of the companies prefer absorption costing method over marginal costing
method as it taken into account both fixed as well as variable expenditures of an organisation.
Therefore, absorption costing method helps to prepare income statement that shows clear and
appropriate financial performance with regard to profitability of an organisation at the period
end.
Difference between absorption costing and marginal costing
Basis Absorption Costing Marginal Costing
Meaning Method to calculate the total
cost of production by
allocating the total cost to the
cost centres determined.
Method to calculate total cost
of production to facilitate the
decision making process.
Cost Category For valuation of inventory and
product costing, both variable
costs and fixed costs are
considered.
Under marginal costing, only
variable cost is taken into
account for inventory
valuation and costing of
products.
Classification of Indirect
Expenses also known as
Overheads.
Overheads are classified under
different heads – production,
administration, selling and
distribution.
The basis of classification of
overheads is fixed cost and
variable costs.
Profit Determination Under absorption costing,
fixed cost is charged to the
cost of production (Macintosh,
and Quattrone, 2010).
Therefore, the profitability of a
product is affected by the
apportioned fixed cost which
Fixed costs are considered as a
period cost and profitability of
different products is assessed
by Profit volume ratio (P/V
ratio).

is borne by each product .
Cost per Unit Cost per unit is directly
affected by the variances in the
closing and opening stock.
Cost Per Unit is not affected
by the variances in the closing
and opening stock.
Effects of Closing Stock If the closing stock is more
than opening stock than the
profit under absorption costing
would be higher than the profit
as per marginal costing
method. The main reason
behind this is that under
absorption costing, portion of
fixed overhead is charged to
closing stock and carried
forward to next year rather
than expensed in current year.
Profit under marginal costing
would be more as compared to
profit as per absorption when
closing stock is less than
opening stock (Marginal
costing vs Absorption costing,
2014). This is because a
portion of fixed cost related to
previous year is charged to the
current year under absorption
costing method.
Net Profit Net profit is relatively low
under absorption costing as it
considers all the costs and
expenses.
Net profit is higher as
compared to other methods
because all costs are not taken
into account under this
method.
TASK 3
P4 Different types of planning tools used for budgetary control with their advantages and
limitations
Budgetary control refers to management of the resources available in the entity to ensure
the effective control of the cost and the operations in the specific period. It is the process which
facilitate the managers to set the specific standards to be achieved in the accounting period and
compare the actual results and find out reasons behind these variances occurred. Thus, budgetary
control helps to improve the performance of the organisation by reducing and eliminating the

unfavourable operations and strengthen the core areas (Renz, 2016). For maintaining control
over disposals, management uses various types of budgetary control techniques. The three major
techniques used by T.M.A Engineering Ltd. are capital budgeting techniques, preparation of
budget and ratio analysis. These three methods along with their benefits and limitations are
explained as follows :
1. Capital Budgeting Techniques: Capital Budgeting is the effective process to
evaluate the feasibility of the large investment projects such as new plant and
machinery and other projects that directly affect the capital structure of the cited
entity. Large investment projects need to be evaluated through various techniques
like Annual Rate Of Return, Net Present Value and internal Rate Of Return to
calculate the exact viability of the projects and choose the project with low risk
and high return (.Scapens, and Bromwich, 2010).
T.M.A Engineering Ltd is planning to invest their money in one of the projects but can't decide
which is to be selected so they have use the following two capital budgeting techniques two
evaluate the feasibility and profitability of both the projects :
▪ Example of NPV (Net Present Value)

▪ Example of IRR( Internal Rate Of Return)