Importance of Management Accounting and Differences from Financial Accounting

This document discusses the importance of management accounting and how it differs from financial accounting. It also explores three techniques that management accountants can use to attain business objectives. The document provides examples and explanations to support the concepts discussed.

Accounting

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
(a) Computing break even point in units and amount of Product A of Walk About Ltd............3
(b) Calculating profit on the sale of 75000 units.........................................................................3
(c) Computation of net profit when Walk About Ltd incurs advertising campaign cost of
£10000.........................................................................................................................................4
(d) Limitations of break even point.............................................................................................4
QUESTION 2..................................................................................................................................5
A) Importance of management accounting, and the way it differ from financial accounting
provides........................................................................................................................................5
Differences between management and financial accounting.......................................................6
Three techniques through which management accountant can attain business objectives..........6
REFERENCES................................................................................................................................8

QUESTION 1
(a) Computing breakeven point in units and amount of Product A of Walk About Ltd
Particulars Amount in £
Selling price 11
Total variable cost 6
Fixed cost 350000
Current selling units 75000
Particulars Formula Amount in £
Breakeven point (units)
Fixed costs/(sales per unit –
variable cost per unit) = 350000/(11-6)
= 70000 units
Contribution Margin
Contribution per unit /sales
per unit 0.45
Breakeven point (in amount)
Fixed cost / contribution
margin = 350000/0.45
770000
Interpretation: It can be stated from the above table, the breakeven point of the company in units
70000 and in terms of amount is £770000 with the fixed cost of £350000.
(b) Calculating profit on the sale of 75000 units
Particulars Amount in £
Sales units 75000
Selling price 11
Sales revenue (75000 * 11) 825000
Less: Variable cost (75000 * 6) 450000
Contribution ((11-6)*75000) 375000

Less: Fixed cost 350000
Net profit 25000
Interpretation: The net profit of the company on the sale of 75000 units of product A is £25000
with the fixed cost of £350000.
(c) Computation of net profit when Walk About Ltd incurs advertising campaign cost of £10000
Particulars Existing strategy New strategy
Selling price 11 13
Variable cost 6 7
Sales units 75000 80000
Sales revenue (80000 *13) 1040000
Less: Variable cost (80000 * 7) 560000
Contribution ((13-7) * 80000) 480000
Less: Fixed cost 350000
Less: Advertising campaign costs 10000
Net profit 120000
Interpretation: Based on the new strategy implemented by Walk About Ltd, in regard to
incurring advertising campaign costs of £10,000 and the increasing the selling price to £13 and
variable cost to £7, the net profit will increase to £120000.
(d) Limitations of breakeven point
There are certain limitations of breakeven point (BEP) which stated below:
 The BEP analysis is based upon few assumptions pertaining to the cost and expenses
which are bifurcated into fixed and variable. But, in the real and practical aspect, it is
impossible to have clear cut division of the costs.
 It is also assumed that the fixed cost will remain same and constant within the certain
level of activity. But, it is important to determine that the fixed cost varies after a certain
limit.

 It also has taken unrealistic assumption in regard to the product sells price which states
that it will remain same irrespective of the level of activity and fixed cost might vary with
respect to change in the level of output (Breakeven Analysis - Strengths and Limitations.
2020). The selling price remaining the same gives the straight revenue line which is not
right. Along with that the selling price of the product is dependent upon the various
factors which are external to the business such as demand and supply, competition etc.
which is very difficult to remain same or constant.
 Many businesses sell more than 1 product so under such circumstances it becomes
difficult to carry out the BEP analysis. Along with this, the product mix to remain
unchanged is also difficult in practice.
QUESTION 2
A) Importance of management accounting, and the way it differs from financial accounting
provides
Management accounting is process of preparing and maintaining financial data,
document or information by manager so that it can several decisions that can be fruitful for
organisation in short and longer time frame. There are numerous importance of preparation and
management of numerous account for company which can be illustrated as follows:
It helps in reviewing actual performance of organisation: Management accounting is
important as it contained all necessary information related to finance and business statistic so that
exact steps can be taken in order to gain more profit from products.
Planning: Secondly, management accounting is important as it represent financial as well as
non-financial information at regular interval so that manager can easily have evaluated
performance and plan steps that need to be taken in order to achieve end goals (Dahal, 2018). So,
it helps manager in planning several strategies that could be used by firm to manage resources,
development of budget for meeting all expense.
Provide reliability: Another importance of management accounting is that it helps in building
reliability of business so that customers can easily trust the company. Various stakeholder such
as investors or employees can easily trust company as management accounting ensure accuracy
of accounts.

Differences between management and financial accounting
Management and financial accounting differ from each other’s as management
accounting is related to collecting of account data in order to prepare financial statements.
Whereas management accounting is including all information related to internal process that are
helpful in making records of businesses transaction. There are various categories on the basis of
which differences can be easily made between management and financial accounts that are
explained as follows:
System: It can be illustrating that management accounting focused on various bottleneck
operations so that company profitability can be enhanced while financial accounting care about
the way profit can be generated.
Timing: Management accounting report must be prepared at frequently basis so that manager
has sufficient information in order to act in particular manners for growth and success of
enterprise. On the other hand, financial accounts are due on specific period or end of each year or
every quarter so that necessary decision can be taken by manager.
Report focusing: It is another key difference between financial and management accounting that
is it lead to preparation of financial statement so that it can be shared to public as well as internal
and external stakeholder. While management accounting emphasis on operations reporting that
need to be shared within firm so that necessary decision can be made by manager (Dávila, 2019).
Standard: In order to prepare financial accounting, manager needs to follow various accounting
standard as compared to management accounting as it is just made for internal consumptions.
More accurate information: It can be stated that financial accounting relies on more accurate
data, statistic and facts so that exact report can be made related to financial information of
company. While management accounting frequently contained estimates data rather than proven
facts.
Three techniques through which management accountant can attain business objectives
From the above analysis it is clear that the management accounting is very helpful for the
company in managing the business operations of the company. this is particularly because of the
reason that when the management accounting is used then this assist the company in managing
the operations in proper and effective manner (Al-Khasawneh, Endut and Rashid, 2020). These
management accounting assist the company in creating a good business decision making as the

use of financial accounts provide a guidance to the employees. The major techniques which the
management accountant can use in order to attain the business objectives are as follows-
Capital Budgeting: it is a most important technique of management accounting. This
technique helps in find out which investment is beneficial for the company and how much profit
it generates, it is a process of evaluating investment and huge expenses in order to obtain the best
return on investment. Organisation would like to invest in all profitable projects but due to
limitation on the availability of capital an organisation has to choose between different projects
through using these techniques: pay back and post payback period and NPV, ARR, IRR
company find out most profitable project. This capital budgeting assists the company in
managing the objective of the business as this assist company in selecting the best alternative for
the purpose of the investment. This will help the company in selecting the best suitable option
which is beneficial for the company.
Marginal Costing: it is the technique which is used for finding out the extra cost
incurred on additional unit of goods and it helps to fix the selling price of the product by using
contribution, fixed and variable cost. In this technique variable cost per unit always remains
constant. And fixed cost does not change with an increase or decrease in production level, it can
help an organization for optimize their production through economies of scale. The use of
marginal costing is helpful in attaining the business objective as this involves the fixed cost and
variable cost and this provide a data to company that how they can manage the cost of the
company (Jbarah, 2018).
Budgetary control: The management accountant uses the technique for planning and
controlling the various activities of the business, it is important technique for directing a business
in desired direction. it is the process by which budgets are prepared for the future and compared
with the actual performance for finding out the variances through this management takes right
decisions, if there are any loopholes then it is removed by working on it and increase
performance and it also helps to co-ordinate the activities of the organisation. Budgetary control
clearly defines the responsibility and promote coordination and communication between
employees. This budget assists the company in managing the business and try to attain the
objective of effective and productive working. The major reason for this is that when the budget
is made then this provides assistance to the company that how they have to work.

REFERENCES
Books and Journal
Al-Khasawneh, S., Endut, W. and Rashid, N., 2020. Relationship between Modern Management
Accounting Techniques and Organizational Performance of Industrial Sector Listed in
Amman Stock Exchange. International Journal of Management, Accounting and
Economics, 7(5), pp.212-234.
Dahal, R. K., 2018. Management Accounting and Control System. NCC Journal, 3(1). pp.153-
166.
Dávila, A., 2019. Emerging Themes in Management Accounting and Control Research. Revista
de Contabilidad-Spanish Accounting Review, 22(1). pp.1-5.
Jbarah, S.S., 2018. The impact of strategic management accounting techniques in taking
investment decisions in the jordanian industrial companies. International Business
Research, 11(1), pp.145-156.
Online
Breakeven Analysis - Strengths and Limitations. 2020. [Online]. Available
Through:<https://www.tutor2u.net/business/reference/breakeven-analysis-strengths-and-
limitations>.