Management Accounting and its Impact

This assignment delves into the crucial role of management accounting in driving organizational success. It examines how advanced management accounting techniques contribute to performance enhancement and explores the influence of both internal and external factors on its effectiveness. The analysis encompasses a deep understanding of various financial statements, including the profit and loss statement, balance sheet, and cash flow statement.

ADVANCED
MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 purpose and presentation of financial information with respect to various stakeholders......1
LO2..................................................................................................................................................2
P2 application of various accounting microeconomic techniques .............................................2
LO3..................................................................................................................................................4
P3 Analysing the concept of variance analysis with the perspective of budget control.............4
P4 Analysing the standard costs and actual costs to correct and control variances....................5
LO4..................................................................................................................................................7
P5 Evaluating the external factors and internal factors changing business environment which
impact on management accounting.............................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Advanced management accounting is very important aspect of each and every
organization whether it is small or big. The present report will be giving brief understanding on
the benefits which are producing accuracy and timely financial information in professional
format. There has been detail justification of the costing value with proper description and uses
of management costing techniques along with these, the role of costing which helps in
maintaining the performance of organization. This report is depicting the clear picture of
budgeting function and variance analysis with the recommendations for taking action on
management and for investigating it properly.
LO1
P1 purpose and presentation of financial information with respect to various stakeholders
The financial statements play very important role in decision making, strategy planning,
identifying success and failures. The financial statements provide organization about financial
transparency. Tax liability has been evaluated, if financial statements have accuracy then will be
mitigating errors. Trust is most important in organization, payment cycle has been improved.
While planning and forecasting financial statements are very important concept. There is
requirement of funds for expanding the business. In context of Large big companies, Enron was
very successful accounting firm has to be closed because of fudging financial statements.
Presentation of various financial statements
1

Illustration 1: Format of balance sheet
Balance sheet gives indication about financial performance of organization. It classifies
assets and liabilities on specified date. Its subsidiary objective to provide exact financial position,
information in context of equity of actual and real owner. Provisions in context of firm against
the possibles losses in the future, it created in form of reserves.
2

Illustration 2: Format of profit and loss statement
Profit and loss statement gives financial earnings performance of the organization of
specific period. It gives description about profitability of organization within specific period.
3

Initial purpose of cash flow statement is to give information in context of cash receipts,
payments, net change in cash with perspective of financing, operating and investing activity of
the organization of specific period.
Stakeholders of organization
External stakeholders Internal stakeholders
Trade creditors and Suppliers Directors
Government Managers
Consumers Shareholders
4
Illustration 3: Format of cash flow

Public Employees
The above table gives a brief understanding of various stakeholders who requires the
financial information because of many other purposes.
External Stakeholders
Trade creditors and suppliers: The stability of customer and payment of all the
suppliers on the stated due has been ensured. The main purpose is to gain knowledge about other
suppliers and products related to organisation. The various transactions are compared by the
companies which are existing and to determine the suppliers which are competitive and their
contribution with respect to organisation (Groot and Selto, 2013).
Government: The main purpose is to collect perfect taxes on due dates and to give
government benefit for improving business. Financial and non-financial assistance has been
obtained for developing projects of the government. With the help of financial information, they
oversee employees in a sensible way and proper compliance with rules of government and
various acts and regulations are usually established by them
Consumers: Knowledge has been gained about cost structure of products which are
produced by a company. Even the stability of organisation has been ensured and along with this
profitability has been known determined. Corporate Social Responsibility activities are also
renowned by the company.
Public: The substantial contribution of an organisation has been determined towards
society. The opportunities which are purely linked to an organisation and CSR contribution have
been known to a country. The purpose of financial information is to make more conscious about
activities which affect the interest of an organization.
Internal Stakeholders
Directors and Managers: various decisions are taken by the managers and directors.
Decision-making is purely based on financial information such as new project decision of
appreciation and regarding new investment. Operations which are continued and discontinued
are accounted by managers. The decision regarding business which has been diversified and
which business has to be wind up. The periodical targets and objectives are established by them
and generally corruptions and dissimulations are been avoided. The main purpose is to raise the
level of productivity with respect to an organization (Granlund, 2011).
5

Shareholders: They use financial information for determining that investment should be
sold, halt or shares should be bought or not for the company. The fair return of the investment
has been decided. The going concern of the company is determined and along with this broad
knowledge has been obtained about the activities of organization. The main objective is to
compare investments and benefits for other industries which are competitive.
Employees: Financial information helps to know about profitability and stability of
employer. Concept of remuneration, employment opportunities and retirement benefits of
respective organization has been known to employees. Job security has been ensured by the
current employer. The clear picture of operation of the organizations has been reviewed by
ensuring fairness of wages and salaries according to margin of organisation.
LO2
P2 application of various accounting microeconomic techniques
The various accounting micro-economic techniques are as follows:
 Relevant Cost Analysis
 Cost Behaviour
 Cost Volume Profit
 Flexible Budgeting
 Cost Variances For Direct Labour
Relevant cost analysis: It refers to the cost which is depicted as relevant from the
prospective of specific decision and for that if there is presence of any alternative action it is also
known differential costs. Opportunity cost gives preference to another alternative as net return
should be realized if resources are properly utilised. The opportunity cost is usually very relevant
for decision-making but sometimes to quantify and identify is very difficult. Sunk cost is referred
to as irrelevant and future cost might be or not relevant. The cost which is relevant to create
variation in alternatives is considered (Sunarni, 2013). If sunk cost is included in decision-
making then it is a bad choice. The assets of the organizations are capitalized and depreciate over
the useful lives.
Cost behaviour: It is giving brief understanding of micro economic behaviour and cost
accounting whose special feature is that how the cost is changing with the change in output
volume. Production, sales and any other principle activity refers to output volume which is
perfect consideration for the company.
6

There are three types of cost i.e. variable cost, fixed cost and mixed cost. Variable cost has linear
relationship with the level of production as it remains constant across the production level with
specific relevant range. Materials are referred as best example for variable cost. Fixed cost does
not vary from level of productions as fixed cost never changes within specific relevant range.
There is decrease in fixed per unit when the production is increased due to similar fixed cost
which is spread over more units. The cost which is neither variable nor fixed within specific
relevant range then it is termed as mixed cost or semi variable cost.
Cost volume profit: In this technique, there is proper analysis of total revenue, total
profits and total cost which is related to volume of sales and it should be purely concerned by
forecasting the changes in sales volume and cost on margin. It can be refereed as break-even
analysis. It is a solution for many situations such as: Budget planning, decisions related to
pricing and volume of sales, to identify the portion for every product to be sold or sales mix
decisions and all decision will directly impact on production capacity and cost structure of an
organisation.
Flexible budgeting: It refers to the budgeting which adjusts and alter the changes with
reference to volume of an activity. While comparing from static budget it is more sophisticated
and more useful as it remains constant in amount regardless with the volume of activity. It has
the ability for organization to predicting performance and level of income at a specific range of
activity levels and sales level. The impact of changes can be observed easily in production and
sales level on expenses, revenue and directly to income. There is presence of more accuracy in
the assessment of organisational and managerial performance.
Cost variances for direct labour: It can be referred as variations between actual
production or actual cost in production and standard cost. In the series of labour variance it is of
two types i.e. Labour efficiency variance and labour rate variance(Taipaleenmäki and Ikäheimo,
2013). In labour rate it is difference between actual cost which is paid for the specific number of
hours and standard cost. In efficiency it is variation between standard labour hour which can be
processed for actual number of units which are produced and number of hours which are valued
at the standard rate.
Thus, all these techniques gives very useful to measure the performance of organization
with effective ways. The cost is major part of business but it should be relevant and behaviour of
cost should be known to the business. If the business is incurring cost to its operations then they
7

should be able to reach break even or cost volume profit analysis. Flexible budgeting and Cost
variances for direct labour are giving major impact on accounting and financial performance of
the organization.
Absorption costing : It refers to the accounting cost which absorbs all manufacturing
costs by units which are produced. The cost in context of inventory of finished unit consists of
direct labour, material and both fixed manufacturing overhead.
Marginal Costing : It is accounting system where whole variable cost is charged for
specific duration and fixed cost of that specific period has been written off fully or its
contribution.
In the same context there are various capital budgeting techniques i.e. Payback period
which identifies time when initial cash flow has been covered by project as these are not
discounted. Net Present value is equal to outflow of initial cash is lessened by aggregate of cash
flow which is discounted. The profitability of the project is calculated in accounting rate of
return where projected net income is divided by initial investment and it is not discounted also.
In Internal rate of return rate of discounting becomes zero and in last profitability index is
referred as ratio of present value of future cash flow to initial investment.
LO3
P3 Analysing the concept of variance analysis with the perspective of budget control
Variance analysis gives and deep analysis of the variations which have emerged from
actual and budgeted financial performance of the organisation. The causes of these variations
between budgeted numbers and actual outcomes are properly analysed for finding the
improvement areas for the organisation. It reflects the budgets which are unrealistic and in this
scenario budgets are revised. It is refereed as a process of determining the differences in
expenses and income of the present year with the budgeted values. It gives brief understanding of
reasons of fluctuations and measures to reduce variance. Generally this helps in making
budgeting activity in better way. In management accounting variance might be favourable or
adverse. The variance may be positive or negative, both reflects negativity on efficiency of
budgeting unless it has been caused by extreme events. The formula of variance analysis is
Actual expense/ income – Budgeted expense/ Income.
Budgeting activity can be efficient from analysis of variance as management desires
lower deviations from the budget which has been planned. Usually lower deviations are desire of
8

every manager which helps in drafting detailed and budgetary decisions which are looking
forward. It also acts as mechanism of control. When the large deviation are analysed on specific
item it helps the management to know the causes and it makes easier for management to trace
possible ways to avoid such deviations. Variance analysis helps in assigning the responsibility
and control mechanism has been engaged on the departments where it is needed. The sub
division discloses the pure relationship which is prevailing in various variances (Contrafatto and
Burns, 2013). All the parameters which are inefficient are highlighted and inefficiency extent as
well. Basically it is used for controlling cost and it should be classified as uncontrollable and
controllable variance so priority has been given controllable variance for taking action. The
work should be planned according to profit and it should be carried by top management. The
outcome of managerial action leads to cost reduction. Consciousness related to cost has been
created among each and every employee of the company.
Variance analysis has been used among each and every corporation but it also has their
own limitations such as it is an activity which is purely based on financial results which are
introduced much later after the closing quarter or it may raise time gap which is directly affecting
the remedial action which creates ability to at certain extent. Each and every source of variance
is not available in data of accounting which helps in taking action on variance is very difficult. If
budgeting is not considered for detailed analysis of every factor, the budgeting will be exercised
might be performed loosely and must be bound to find the variation from the actual numbers.
Analysing variance is not considered as a very useful activity. The occurrence of variances in
many items from the list which is budgeted so in this series various kinds of variance are
analysed such as sales quantity price, sales mix variance, sales price variance, labour rate
variance, labour efficiency variance, fixed overhead expenditure variance etc. Basically it
involves various reasons in context of isolation of variations in income and expenses within
specific duration from standards of budgeting. For example if budgeted cost of direct wages is
200000 and its actual cost is of 300000 of that given duration. It must have capability to identify
reason for increase in direct wages such as : Increment in wage rate, Workforce productivity is
decreased and more wages because of less production according to budget.
P4 Analysing the standard costs and actual costs to correct and control variances
Standard Cost: It is a planned or budgeted or predicted cost of unit for any service or
product, and regarding this assumption has been taken for holding goods' which are given and
9

efficiency has been expected and even cost level with in the company. The standard cost usually
represent the forecasted or planned unit cost of material, overhead and labour which has been
expected for service or product. Standard costing is useful for preparing budgets such as more
accuracy in planning and forecasting (B Douglas Clinton CMA, 2012). The organisation has
been controlled via exception reporting. It is very important for valuation of inventory and it also
simplifies the cost book keeping. The staff has been rewarded and motivated when standards
such as targets or goals and even financial incentives for motivating staff. For setting standards
targets should be challenging but along with this it should be realistic. High financial reward
should be linked to high achievement of very challenging targets and incentives should be
moderate for targets which are easier to accomplish. While setting targets each and every staff
should be allowed to participate and to give suggestions, this activity will lead to improving the
motivation, level, increase the job satisfaction and frustration will be reduced.
There should be development of proper trust and communication between top
management and staff, management should try to avoid challenging targets which are not
achieved. Planning should be best and standards should be ensured along with the targets which
are used, must be very realistic and achievable. The periodic reviews should be frequent of the
targets or standards must be ensured and properly attainable. Standard costing refers to
establishing the cost standards for some activities and there periodic analysis for identifying
reasons for variances.
Actual cost refers to the accounting term which is amount of money that is actually paid
for acquiring asset or product. The cost can be historical, past or present day cost of any product.
With reference to managerial accounting, costs are budgeted and even forecasted. These both
cost does not represent as actual or real cost. The budget should be set by management to
purchase any new equipment but this budget does not create always. Actual cost consists of
direct cost, indirect cost, fixed costs, variable costs and sunken costs. The cost which is directly
linked to the task are very specific and obvious can be easily identifiable is easily referred as
direct cost and in this example can be fixed costs and variable costs. Indirect cost refers to the
cost which has indirectly support the task and it is not easy to calculate like administrative
services.
Fixed cost refers to the cost which is constant throughout the whole task like cost to rent
equipment. Variable cost indicates those cost which are changing during the task, for example
10

the hours of computing financial may be higher at beginning but at the last moment manager
may roll off the task between the process of task. The cost which has incurred but usually it is an
error or due changes related to scope as this cost should be also included while calculating the
total cost of the task. The standard cost and actual cost should be compared and this is referred as
variance analysis which is very important for controlling costs and to determine ways for
improving profitability and efficiency. If the actual cost is exceeded by standard costs then this
variance is referred as unfavourable and in the vice versa situation like standard cost is more than
actual cost then it will be refereed as favourable variance. Usually variance analysis has been
conducted for direct material, labour cost and overheads cost (Rikhardsson and Yigitbasioglu,
2018).
LO4
P5 Evaluating the external factors and internal factors changing business environment which
impact on management accounting
Internal factors External factors
Value systems Suppliers
Mission and objectives Competitors
Financial Factors Marketing intermediaries
Internal relationship
The above table is giving brief summary about the factors which are giving huge impact on
management accounting and they are classified in two categories such as external factors and
internal factors.
External Factors
Suppliers are the people who are generally responsible for supplying the outputs which
are necessary for an organization and smooth flow of production has been ensured. Competitors
are very close rivals and in this series for surviving in competition there has to be proper track of
the industry or market for formulating strategies and to face the competition. In the same series
marketing intermediaries of the organization in selling, promoting and for the distribution of
various services and goods for the final users. These intermediaries are essential link between
11

customer and business. In the perspective of macro environment economic factors like economic
conditions and policies that are gathered for the economic environment. Growth rate, inflation
and major restrictive trade practices are considered for creating impact on business.
Social factors consists of the society to first preference for consuming and buying pattern
of the customer with the belief of person with educational background and purchasing power.
Political factors are totally related to the public affair of the management and its impact on
business. There is requirement of political stability and it should be maintained for the stability
of trade. In the same series of external factor, technological factors helps in improving the
product marketability which helps in making it more customer friendly(Mena, Van Hoek and
Christopher, 2018).
Internal Factors
The factors which are existing in premises of organization and it will directly give impact
on various operations which are carried in business such as value system, mission and objectives,
financial factors and internal relationship. Value system is directly implied to norms and culture
of the organization. The regulatory framework of any of the business and member of the
company has to be in that specific limit. Various mission and objective guides the different
priorities, philosophies and policies of business. Financial factor such as capital structure,
financial position and financial policies gives direct impact on performance of business and
strategies. Factor such as amount of help given to the top management which has been enjoyed
from the shareholders, board of directors and the employees makes the function very smooth of
business.
Pestle analysis of Enron
Political The management was effected by political factors, as it changes potential
for legislation.
Economical All the monetary policy, inflation rates are always altered so this has led
to economic growth.
Social The culture was different of all employees, so this has impacted there
work and level of efficiency.
Technological Technological enhancement has also impacted management, because all
employee were of old technology so sudden change lead to difficulty.
12

Legal Enron was impacted by various taxation policy which made them in
difficulty, and in same series employment laws and industry regulations.
Environment The attitude of customer of Enron was towards it competitor because of
more advanced technology.
CONCLUSION
From the above report it has been clearly understood that advanced management
accounting plays very essential role in the organization whether it is small firm or large firm.
Further it has concluded on the main purpose for developing and presenting the financial
information with the perspective of various stakeholders. Management accounting techniques
give major support to the performance of organization. By summing up, there is deep analysis of
management accounting gets impacted by various external factors and internal factors of
environment.
13

REFERENCES
Books and Journals
B Douglas Clinton CMA, C. P. A., 2012. Roles and practices in Management accounting: 2003-
2012. Strategic Finance. 94(5). p.37.
Contrafatto, M. and Burns, J., 2013. Social and environmental accounting, organisational change
and management accounting: A processual view. Management Accounting
Research. 24(4). pp.349-365.
Granlund, M., 2011. Extending AIS research to management accounting and control issues: A
research note. International Journal of Accounting Information Systems. 12(1). pp.3-19.
Groot, T. and Selto, F. H., 2013. Advanced management accounting (pp. 339-378). Harlow/New
York: Pearson.
Mena, C., Van Hoek, R. and Christopher, M., 2018. Leading procurement strategy: driving value
through the supply chain. Kogan Page Publishers.
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.
Sunarni, C. W., 2013. Management accounting practices and the role of management accountant:
Evidence from manufacturing companies throughout Yogyakarta, Indonesia. Review of
Integrative Business and Economics Research. 2(2). p.616.
Taipaleenmäki, J. and Ikäheimo, S., 2013. On the convergence of management accounting and
financial accounting–the role of information technology in accounting
change. International Journal of Accounting Information Systems. 14(4). pp.321-348.
ONLINE
Management Accounting system, 2018. [Online]. Available through
:<http://smallbusiness.chron.com/factors-affecting-management-accounting-systems-
79769.html>.
Variance analysis, 2018. [Online]. Available through
:<https://accountlearning.com/understanding-variance-analysis-meaning-definition-types-
advantages/>.
14

15