Analysis of Management Accounting Systems at Unicorn Ltd (2017)

This report analyzes the application of management accounting principles within Unicorn Ltd, a retail business. It begins by presenting a management accounting (MA) system, including cost accounting, price optimization, job costing, and inventory management, emphasizing their significance in enhancing profitability and decision-making. The report then explores various reporting methods, such as job costing reports, accounts receivable aging reports, and budget/performance reports, highlighting their benefits for financial planning and resource allocation. Furthermore, it delves into cost calculation using absorption and marginal costing, comparing their advantages. Finally, it examines budgetary control techniques and how Unicorn Ltd can adapt MA systems to address financial challenges, offering a comprehensive overview of financial management strategies for the company.

MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
P1 Presenting MA system that Unicorn can use for effective financial management.................1
P2 Explaining different methods which can be used for reporting purpose as per managerial
accounting....................................................................................................................................4
P4 Calculation of cost using absorption and marginal costing....................................................6
P4 Explaining advantages and drawbacks of different budgetary control techniques...............10
P5 Comparing how business unit adapt management accounting system for responding
financial problems......................................................................................................................13
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................................16

INTRODUCTION
Managerial accounting becomes vital for business units which in turn facilitates optimum use of
financial resources. In recent times, cost control is one of the main motives of firm because it is highly
associated with the enhancement of customer base and profit margin. In this regard, managerial
accounting tools as well as concepts are highly significant that assists in identifying areas of cost control
and thereby helps in improving profit margin. Thus, by considering the tools of management accounting
business unit can develop suitable and strategic framework for the near future. For this project report,
Unicorn has been selected which offers retail products or services to the customers. In this, report will
highlight the requirements as well as manner in which MA system aid in the growth and profitability
aspect of firm. Besides this, it also provides deeper insight about the reporting and planning tools on the
basis of management accounting. Further, it also shed light on the manner in which MA tools help in
responding monetary problems.
P1 Presenting MA system that Unicorn can use for effective financial management
To
Management Team
Unicorn Ltd
Date: 28th December 2017
Subject: Management accounting system
INTRODUCTION: In this, MA tools have discussed along with the reasons due to which they are
essential. Along with this, benefits and drawbacks of each system have also discussed which retail
unit needs to keep in mind while carry out business activities.
Main body
Management accounting and its significance
Management accounting (MA) is highly concerned with taking daily or short term decisions that
contributes in the firm’s profitability. It lays high level of emphasis on analyzing and communicating
internal monetary information that contributes in goal attainment (Fullerton, Kennedy and Widener,
2013). System and aspects of MA are highly significant in the following manner:
 MA tools help in monitoring the performance of departments and assists in taking
action.
 Further, MA makes improvement in cash flows by reducing the level of expenses.
 Facilitates effective business decisions and enhances financial returns.
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MA system: It includes several systems that uses existing operational data and creates informative
reports for decision making.
Cost accounting: This system of MA focuses of recording expenses that are incurred by business
unit for producing or offering products to the customers. Moreover, firm incurs several direct as well
as indirect expenses while offering services to the customers. In this, cost accounting system focuses
on accumulating both direct as well as indirect cost and dividing the same with number of units or
offerings. This in turn helps firm in assessing per unit cost and thereby assists in taking suitable
pricing decision (Coyne and et.al., 2010). Without setting appropriate price firm cannot get profit
margin and recover the expenses incurred. Thus, using cost accounting system manager of Unicorn
can assess unit cost, determine profit margin and sets price.
Price optimization: This system can be used by retail business organization for setting prices as per
the expectation of customers. By using this, firm can assess or evaluate the reactions of customers at
different price level. Thus, by considering this firm can meet its objectives and maximize operating
profit margin.
Job costing: It helps in recording the cost that is associated with the manufacturing aspect. Thus, by
undertaking job costing system firm can track performance and would become able to improve
operations as well as profit margin.
Inventory management: Business unit can use EOQ, JIT etc techniques for managing inventory
within the firm. Moreover, lack of stock closely affects smooth functioning of firm and affects
customer base. On the other side, high inventory imposes storage cost in front of firm and thereby
impacts profit margin (DRURY, 2013). Along with this, by using FIFO, LIFO etc methods firm can
do stock valuation and take decision about future.
Merits and drawbacks of varied accounting system
Job costing
Advantages Disadvantages
 Facilitates comparison of price, cost
and profit with estimates on the
completion of job and thereby exerts
control on cost
 Helps in performing trend analysis
and facilitates pricing of job
(Advantages and Disadvantages of
Job Costing, 2017)
 Clerical work is required for
maintaining detailed information
 It is highly expensive and time
intensive
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Cost accounting
Advantages Disadvantages
 Helps in cost reduction through
elimination of wastage
 Provides suggestion in relation to
make or buy
 In the costing records, past
information is available, whereas
management is concerning in
relation taking decision about future.
Inventory management
Advantages Disadvantages
 Cost control and profit maximization
 Ensures smooth functioning of
operations and thereby eliminates
business risk (Faÿ, Introna and
Puyou, 2010)
 It is highly time consuming because
there is a need of in-depth evaluation
Price optimization (PO)
Advantages Disadvantages
 Such system MA provides high level
of assistance in setting suitable
optimal price.
 It also helps in enhancing customer
base
 For making assessment of
customer’s responses manager of the
firm has to devote more time
Conclusion: It can be concluded from evaluation that Unicorn should lay high level of emphasis on
undertaking cost accounting, inventory management and price optimization system. Thus, by applying
the tool of cost accounting and PO firm can fix appropriate price. Besides this, it can be stated that
through managing stock by using inventory management tool concerned retail unit can control cost
and maximize profit margin.
Sincerely
Management accountant
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P2 Explaining different methods which can be used for reporting purpose as per managerial
accounting
To
Management of Unicorn Ltd
Date: 28th December 2017
Subject: Managerial accounting reports
Introduction: The present report is based on various managerial reports that business unit can use to
meet informative and decision making requirements. Further, in this, application and merits of
managerial reports are also presented in the context of Unicorn retail store.
Task
Different types of managerial reports: By preparing below mentioned reports manager of Unicorn
can assess business performance more effectively. All such reports give input to the management
team of the firm and thereby aid in appropriate decisions. Thus, main reports that can be prepared by
Unicorn for developing competent framework are enumerated below:
 Job costing report: It clearly depicts expenses that are associated with specific
project. In addition to this, revenue is also matched or compared with estimated
revenue with the motive to evaluate job’s profitability. This in turn helps firm in
assessing high earning areas instead of wasting time on low performing projects
(Fullerton, Kennedy and Widener, 2013). Thus, considering such aspect it can be
stated that job cost report helps firm in making efforts and allocating resources to
highly profitable projects. Besides this, projects which are in progress, manager of the
retail unit can take suitable decision before cost or expenditure level exceeds budget.
 Accounts receivable aging report: Effective cash flow management is highly required
within the firm for carry out business activities in the best possible way. In this,
accounts receivable aging report assists management team of retail unit in taking
pertaining to credit extension to its customers. In other words, it can be depicted that
such report helps in assessing the debtors who are making payment within 30, 60 and
90 days in a separate columns. Thus, such separate invoice column helps business
organization in identifying the problems take place in the collection process. On the
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basis of such aspect, corporation can tighten its credit policies pertaining to the
customers who are unable to make payment. Thus, by doing analysis and evaluation
of accounts receivable aging on periodical basis company can reduce or avoid the
level of debt to a great extent.
 Budget or performance report: In the current time frames, managers prepare and use
budget in relation to comparing actual expenditure with predetermined standards.
Thus, performance report contains information about the differences which take place
between actual and budgeted expenses. It also furnishes information about the reasons
due to which deviations are occurred. In this, by considering the causes business unit
can take appropriate action within the suitable time frame (Types of Managerial
Accounting Reports, 2017). Along with this, through using such report and
considering deviations owner of retail unit can develop competent financial plan or
budgeting framework.
 Inventory and manufacturing report: Prominent stock management is needed, in the
context of retail unit, because it has direct influence on cost level. Ordering and
holding are the main cost which are highly associated with stock and have an impact
on profit margin. In this regard, by using inventory and manufacturing report firm can
make its manufacturing process more efficient (Ionescu, 2016). Thus, through
undertaking such report manager of the firm can assess wastage level, labour and
overhead cost. In this way, by assessing deviations firm would become able to take
strategic measure for improvements.
Merit and importance of management accounting reports: By using managerial reports retail firm
can get most valuable information and thereby become able to take appropriate decision that make
contribution in the attainment of organizational goals. Thus, main benefits which managerial
accounting reports offer are enumerated below:
 Facilitates optimum allocation of resources in different projects
 Helps in doing make or buy analysis
 Assists in performing relevant cost analysis and profit planning
 Provides input for developing suitable budget for upcoming period and helps in
framing competent strategies as well as policy for performance improvement.
Application: From assessment, it has found that budget, accounts receivable aging and inventory &
manufacturing reports are highly suitable or appropriate in the context of Unicorn. Moreover, for
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making effective use of financial resources retail unit lays emphasis on the preparation of budget. In
this, by doing comparison of actual income and expenses with budgeted figures business organization
can identify the need for improvements. In addition to this, accounts receivable report also helps firm
in assessing whether there is need to tighten the credit policies or not. In addition to this, through
preparing and using stock report company can assess the extent to wastage of both raw and finished
products take place within the firm. Thus, by making evaluation of all such aspects firm can take
action for improvements and thereby enhance profit margin.
Conclusion: It can be summarized from overall assessment that managerial reports serve suitable
information for decision making. Thus, by framing and undertaking all the above depicted reports
firm can make suitable plan for the near time period.
Sincerely
Management accountant
P4 Calculation of cost using absorption and marginal costing
Cost accounting is a specific branch of accounting that key target is to capture company’s
production cost by adding together the cost of input. It includes cost determination and its
thorough analysis helps managerial team in assessing cost behavior, variance analysis and
analyzing cost-volume-profit relationship (Quattrone, 2016). Such analysis aids in better
planning and controlling decisions for Unicorn Ltd. There are two methods used for the purpose
of cost measurement; marginal and absorption which are enumerated underneath:
Marginal costing: Marginal production cost of an item can be found just by adding
together all the variable overheads. With the increase in production and sales volume variable
costs also reflect proportionate changes. In contrast, fixed cost that remain constant or unchanged
is regardless of both output and sales volume. It is a principal techniques used in cost accounting
and aids in successful decisions because it enable Unicorn’s managers to focus on the changing
cost elements like material, labor and other variable costs i.e. manufacturing overheads, sales
cost and others (Hoare, 2015). According to the method, contribution can be compute through
subtracting variable cost from the sales. It is extremely useful for the managers because it gives
an idea to them about how much capital is available in order to pay fixed overheads.
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Absorption costing: This method builds up full product cost adding together direct and
indirect costs of production using an overhead absorption rate. It use full cost incurred by
Unicorn Ltd for cost of manufacturing as well as opening and closing stock valuation. Besides
this, unlike marginal method, it also make necessary adjustments regarding under-absorption and
over-absorption of overheads.
Calculation of unit costs under absorption and marginal cost
Particulars Absorption Marginal
Material consumed 6 6
Labor's wages payment 5 5
Production overheads
Variable 2 2
Fixed 3
Cost of one unit of production 16 13
Calculation of fixed operating cost each unit:
¿ Total actual ¿ production cost /Number of units manufactured
¿ £ 2100/700 units
¿ £ 3
Income statement as per absorption costing method
Particulars Amount
Total sales revenue (600 units @ 35/each) 21000
Less: Total production cost
Material (700 units @6/each) 4200
Labour (700 units @5/each) 3500
Variable production overheads (700 units @2/each) 1400
Fixed production overheads (700 units @3/each) 2100
Total costs of manufacturing 11,200
Add: Inventory at the beginning of the year 0
Less: stock at the closing of year (600-500) = 100 units @ 16/each 1600
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9600
Over-absorbed fixed overheads 100
Costs of goods sold 9500
Gross profit 11500
Less: Other overheads
Administration cost 700
Selling cost 600
Variable sales overheads 600
Total overheads 1900
Net profit 9600
Working note:
¿−absorbed ¿ overheads= Actual ¿ overheads – Budgeted ¿ overheads
¿ GBP 2,000 – (700units∗GBP 3)
¿ GBP 2,000 – GBP 2,100
¿ GBP 100
Gross profit =sales – cost of goods sold
¿ £ 21,000 – £ 9,5 00
¿ £ 11,5 00
Net profit=Gross profit – total other overheads
¿ £ 11,500−£ 1,9 00
¿ £ 9,6 00
Income statement as per marginal costing method
Particulars Amount
Total sales revenue (600 units @ 35/each) 21000
Less: Total production cost
Material (700 units @6/each) 4,200
Labor (700 units @5/each) 3,500
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Variable production overheads (700 units @2/each) 1,400
Total costs of manufacturing 9,100
Add: Inventory at the beginning of the year 0
Less: stock at the closing of year (600-500) = 100 units @ 13/each 1300
Costs of goods sold 7,800
Add: variable sales overheads 600
Total variable cost 8,400
Contribution 12,600
Less: Other overheads
Administration cost 800
Selling cost 600
Fixed production expense 2000
Total overheads 3400
Net profit 9,200
Working note:
Contribution=sales – TVC
¿ £ 21,000−£ 8,4 00
¿ £ 12,6 00
Net profit=Contribution−total ¿ overheads
¿ £ 12,600−£ 3,4 00
¿ £ 9,20 0
Profitability reconciliation statement
Particulars Amount
Net profit as per absorption costing method 9,600
Less: Fixed production overhead on ending inventory (100 units @3/each) 300
Less:: Over-Absorbed overheads 100
Net profit as per marginal costing method 9,200
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Interpretation: The findings determined that per unit cost under marginal and absorption costing
method is found to £13 and £16 each unit due to exclusion of fixed manufacturing overheads incurred @
£3/unit in first method. As a result, production cost significantly reported different results to £9,100 and
£11,200 in variable and full method of costing. This is the reason, why later method valued stock at
higher cost of £1,600. Gross profit is derived to £11,500 whilst contribution is comparatively higher to
£12,600 due to excluded fixed manufacturing cost while variable sales overheads has been included to
derive TVC. Net profit under absorption cost found to £9,600 and as per reconciliation statement, if it is
subtracted by fixed cost on closing stock worth £300 and over-absorbed fixed overheads of £400, then net
profit under full costing can be derived to £9,200.
P4 Explaining advantages and drawbacks of different budgetary control techniques
Budgetary control is a system of comparing budgeted figures with the actual results to
find out discrepancies with the view to take remedial actions at a right time. The process of
budgetary control includes budget formulation, maintaining coordination, assigning
responsibilities, comparing actual and expected results and corrective action to achieve desired
profit targets (Zimmerman and Yahya-Zadeh, 2011).
Incremental budgeting: As name suggests, it is a method wherein budget is prepared
using either the actual performance or budget of preceding period with some incremental
charges. It assigns resources considering previous allocation and believes in encouraging
spending up (Quattrone, 2016).
Advantages:
 Stable and gradual changes only
 Consistency in departmental operations
 Simple to operate and preparation is easy
 Avoid conflicts among Unicorn’s all the departments
 Useful to maintain strong coordination
Drawbacks:
 It believes in similar working method over the period not found appropriate, however, in
modern era, it does not look appropriate.
 No incentive and reward is available to bring new and interesting thoughts for cost-
cutting.
 Always boost spending
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