Importance of Management Accounting

This document discusses the importance of management accounting in business operations, budgeting, controlling, and strategic management. It also explores various techniques of management accounting such as cash flow analysis, marginal costing, and ratio analysis.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
Question 1....................................................................................................................................3
Question 2....................................................................................................................................5
Importance of Management Accounting.....................................................................................5
Techniques of Management Accounting.....................................................................................6
REFERENCES................................................................................................................................1

Question 1
Break even analysis calculates the margin of safety, representing the level of sales required to
cover the costs of the organisation. It reflects the revenues generated and the associated costs for
a particular product. It discloses a selling point where there is no profit no loss situation and it is
very important for a company to attain at least such point to survive in the market (Pelz, 2019).
Break even analysis is used for internal purpose only and the information serves the management
and employees, it is of no use to outsiders. This analysis helps in finding break even at different
levels of operations.
Calculation of Walk About Ltd. Selling product A:-
a) CALCULATION OF BREAK EVEN POINT
PRODUCT A (75000 UNITS)
Particulars RATE UNITS PRICE
SALES 11 75000 825000
(VARIABLE COST) 6 75000 450000
CONTRIBUTION 5 375000
(FIXED COST) 350000
PROFIT 25000
BREAK EVEN ( in units)
Fixed cost 350000
Contribution per unit 5
Fixed cost/ Contribution per
unit 70000
The break even point of Walk About Ltd is at 70000 units where the company at current selling
price is at no profit situation. It says that it is necessary for the company to sell these many units

and beyond these it shall earn profits. Like in this situation the company sells 75000 units which
helps it gaining 25000 profit.
BREAK EVEN ( in value)
Fixed cost 350000
P/V Ratio 0.455
Fixed cost/ P/V Ratio 770009.240
b) CALCULATION OF PROFIT AT 75000 UNITS
PRODUCT A (75000
UNITS)
RATE UNITS PRICE
SALES 11 75000 825000
(VARIABLE COST) 6 75000 450000
CONTRIBUTION 5 375000
(FIXED COST) 350000
PROFIT 25000
C) CALCULATION OF NEW PROFIT AT 80000 UNITS
PRODUCT A (80000 units)
RATE UNITS PRICE
SALES 13 80000 1040000
(VARIABLE COST) 7 80000 560000

CONTRIBUTION 6 480000
(FIXED COST) 360000
PROFIT 120000
If the company manages to sell 80000 units per unit at 13 it shall gain an approximate profit of 120000
with an additional advertising expense of £10000.
Question 2
Importance of Management Accounting
Certain advantages of management accounting are namely;-
Budgeting- The financial information is being communicated to the management from various
sources, which is then used to design effective budgets. Based on the current data we forecast
future level of operations and accordingly budgets are designed (Abdusalomova, 2019)
1) These budgets are a sound blueprint for the workforce to conduct their activities.
2) Controlling- Management accounting plays a vital role in the controlling function of
management wherein it can monitor optimum utilisation of human resources, minimising
the cost while maximising the output, business operations, wastages etc.
Strategic Management- It highlights its importance in building strategies with the help of various
tools such that the company is able to build its core competencies and get an edge over its
competitors (Ameen, Ahmed and Abd Hafez, 2018)
3) . Such decisions are directly manifested to the growth of the company.
MANAGEMENT ACCOUNTING FINANCIAL ACCOUNTING
1) Its main objective lies in analysing the
financial information and decision making by
formulation of policies and plans for future
assistance.
1) Its objective is preparation of the financial
statements to reflect the end results of the
company and its current financial position to
its users.
2) They are informal reports forecasting the
future of the company used within the
organisation by mangers and the employees
2) They are formal reports for prior year which
is relevant for external parties like shareholders

(Rikhardsson and Yigitbasioglu, 2018)
.
and lenders.
Techniques of Management Accounting
1) Cash Flow Analysis- It can be used as a technique of management accounting wherein we
observe the movement of cash from one period to another. It reflects the inflows and outflows of
cash in various activities. It thus serves crucial role in proper cash management and ensures
sufficient liquidity with the company.
2) Marginal Costing- It can be another technique of management where fixed cost, variable
cost and the contribution is calculated to take various make or buy, accept reject
decisions based on the profitability of the company. It also helps in fixing an apt selling
price.
Ratio Analysis- It facilitates comparative analysis within the industry and also judges the
financial well being of the company based on trend analysis (Alborov and et.al., 2017)
3) . It picks various variables from the financial statements to observe the operational
efficiency, liquidity and profitability.

REFERENCES
Books and journals
Abdusalomova, N. B., 2019. DIRECTIONS FOR DEVELOPMENT AND IMPROVEMENT
OF A MANAGEMENT ACCOUNTING SYSTEM. Economics and Innovative
Technologies. 2019(3). p.6.
Alborov, R. A. and et.al., 2017. The development of management and strategic management
accounting in agriculture. Journal of engineering and applied sciences. 12(19). pp.4979-
4984.
Ameen, A. M., Ahmed, M. F. and Abd Hafez, M. A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch Journal
of Finance and Management. 2(1). p.02.
Fleischman, R. and McLean, T., 2020. Management accounting: theory and practice. Routledge.
Pelz, M., 2019. Can management accounting Be helpful for young and small companies?
Systematic review of a paradox. International Journal of Management Reviews. 21(2).
pp.256-274.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
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