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)

Above analysis shows that T.M.A Engineering Ltd should invest in Project A as both net
present value and internal rate of return of Project A is higher than Project B.
Advantages:
1. Capital budgeting techniques facilitates the management to effectively exploit the
financial resources to achieve the high returns.
2. Positive Viability of the projects encourage employees and the staff of the organisation to
enhance their capabilities and give their best to achieve the goals as they know success of
these projects enhance the market share of the organisation which ultimately leads to
their promotions, incentives and bonus.
3. Capital Budgeting enables the T.M.A. Ltd to select such projects which provides higher
return on potential investment (Schaltegger, Gibassier, and Zvezdov, 2013).
4. This technique helps in ascertaining profitability and viability of different projects and
helps to select better one from two mutually exclusive projects.
5. It is simple to understand as calculations are not complex and lengthy.
Disadvantages:
1. Capital budgeting Techniques can only be performed by the accounting expertise and
skilled employees are needed to understand the same.
2. Budgeting techniques are time consuming and huge which make them complex.
3. There may be a chance when supervisors of different departments shows the estimated
expenditures on high level which clearly shows that they want to avoid the situation of
over expenditure. In that case, organisation will not be able to clearly understand their
financial position and their rate of over expenditure (Strumickas, and Valanciene, 2015).
TASK 4
P5 Compare how organisations are adapting management accounting systems to respond to
financial problem
Management accounting played a significant role in order to solve financial problems in a
effective manner. It provides various tools and techniques which can solve complex financial
problems and provide an appropriate solution for the business organisation. These management

concepts can assist the cited business units which are facing various problems which can be
related with their daily operations. It is the responsibilities of accounting manager of T.M.A
Engineering Ltd. A cited enterprise try to adopt various effective techniques or methods to solve
different financial problems which might be occurred due to emergence of advanced technology
or expansion of existing business. Apart from this a cited company implemented various
techniques or methods to resolve upcoming financial problems or issues. In other words
management accounting plays a very eminent role in solving various issues of finance with the
help of experienced and skilled persons.
A cited enterprise implemented many more techniques for example-
1. Established various effective plans or strategies to overcome upcoming risks or
uncertainty.
2. Conduct improvement programmes.
3. Enhance the knowledge or skills of employees and overall enterprise by implementing
useful training session.
4. Prepare appropriate budget.
5. Preparation of impressive and accurate financial statements which is very helpful in
decision making process of an organization.
Therefore some of the impressive methods or techniques which plays a very eminent role
in overcoming the barriers of financial issues. Key Performance management indicators: This is the technique developed by members
to regulate the performance of team and employees according to their financial cost. This
can be accomplish by quantitative analysis of performance and profit over the cost
incurred to develop skills to perform task effectively. This the the indicators which
defines key performance of particular functional department of company and the
financial investment over the particular department. Bench Marking: This is the process of defining the performance standard in compliance
w8ith the present performance and the expected performance of company. This creates a
bench mark of the organisation in terms of financial profitability that have to be achieved
by analysing current performance and examining the future objectives. This techniques is
utilised in adverse conditions or financial crisis to enhance the performance of company

effectively. In this technique an enterprise set standard on which an enterprise can easily
achieve their enterprise goals and targets. Budgetary target and control: This is defined by manager of company to analyse various
loss due to wastage of resource and extra cost incurred in process. The manager of
company defines budgetary target that are to be achieved by reducing wastage, increasing
performance efficiency and optimum utilization of resources and funds available in
business firm. The manager should have appropriate control over the formulation of
budget ion every financial year and control over wastage of resources and the losses that
are faced by firm due to wrong decision making. So, manger is the authority who
develops budget in order to account and manager various future investment plan of
company. Financial Governance: There are various established financial governance that helps in
regulation and developing various policies related to effective management of accounts
and finical statements of company. These area the various trustees and expert that guide
business organisation manager to implementation and development of financial policies
and budget efficiency to reduce wastage of funds and managing their future investment
appropriately. Governing bodies plays a very eminent role in the financial problems by
enacting various laws, rules and regulations or beliefs. Analysis through comparative financial statements: A business unit required that to
make effective strategies in order to provide competitive position in the market.
Therefore, cited business units can use their financial information and data and compare
these data with their historical performance. It can help to make their decision effective
as compare to their rival companies.
 Fund flow analysis and cash flow analysis: This is another important tool which can be
used by the accounting officer and finance manager of T. M.A Engineering Ltd in order
to manage their financial resources. Because, the firm's is facing various problems which
can affects their profitability and revenue. Therefore, they can use fund flow statement
analysis, which can helpful to track the movement of cash and their financial resources,
so that they can manage properly of their cash in order to attain their long term goals and
objectives.( Types of Managerial Accounting Reports. 2017).

 On the basis of cost accounting: Cost management is one of the major issues for each
and every business unit. Hence, the cited business entities are required to use an effective
cost control tools so that they can manage their finance in a appropriate manner.
 Marginal costing: Various problems can be resolved which are related with cost through
the implications of concepts mentioned in marginal costing techniques. Management
accounting officer of Power press repair ltd and T.M.A Engineering Ltd are using
method of cost volume profit analysis under marginal costing.
CONCLUSION
The above report signifies that T.M.A Engineering Ltd is the small business venture
various management accounting techniques to find out the loop between the standards
maintained and actual results received. This helped them to take effective steps to improve their
efficiency and productivity to sustain in the market for long run. This report also signifies the
advantages and disadvantages of the absorption costing and marginal costing and analysed that
absorption costing is more clear and effective to present the financial performance of the cited
entity. There are different management reports that ease the analysis of the financial position of
the organisation and facilitates the decision making regarding the short term and long term goals.
T.M.A. Engineering Ltd is using Budget report method as it is small business venture and easy to
be maintained. This report also includes comparison of the T.M.A. Engineering Ltd with its
competitor Power Press Repair Ltd. to explain the difference between the two management
accounting methods and their effects on both the organisation.

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