Management Accounting System and Its Applications

1 Management Accounting Grootstone Management Accounting 1 INTRODUCTION 1 TASK 11 P1: Management accounting and its types of management accounting systems 1 P2: Different methods used for management accounting reporting3 M1: Evaluate the benefits of management accounting systemandits applications 4 D1: Management accounting system and its reporting are integrated within organisational process 5 TASK 25 P3: Calculation of cost using an appropriate technique5 M2: Various types of accounting techniques7 D2: Data interpretation8 TASK 38 P4: Budgetary control and

Management Accounting

Table of Contents
Management Accounting.................................................................................................................1
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and its types of management accounting systems........................1
P2: Different methods used for management accounting reporting............................................3
M1: Evaluate the benefits of management accounting system and its applications...................4
D1: Management accounting system and its reporting are integrated within organisational
process.........................................................................................................................................5
TASK 2............................................................................................................................................5
P3: Calculation of cost using an appropriate technique..............................................................5
M2: Various types of accounting techniques..............................................................................7
D2: Data interpretation................................................................................................................8
TASK 3............................................................................................................................................8
P4: Budgetary control and different types of planning tool and their advantages and
disadvantages used in budgetary control.....................................................................................8
M3: Uses and applications of planning tools for preparing and forecasting budgets...............10
TASK 4..........................................................................................................................................10
P5: Responses of management accounting system to deal with financial problems................10
M4: Management accounting can lead organisation to sustainable success in responding to
financial problems.....................................................................................................................12
D3: Planning tools respond appropriately to resolve financial problems.................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is a systematic approach that support in management activities
by planning, controlling, monitoring and enhancing organisation performance. It allows
management to develop their knowledge and understanding which helps them in taking
investment and financial decisions. It also helps in identifying company's financial position by
preparing income statements, balance sheet, statements of owners equity etc. for a given
financial period (Abugalia, 2011).
Pavestone is a stone and concrete supplier. It constantly developing new products and
services ensure them in maintaining their position as the most successful autonomous supplier of
natural stone paving and walling into the construction's mercantile establishment. In this report
company is importing, manufacturing and supplying construction products with a healthy pricing
strategy by using various management accounting systems, reporting methods, its benefits on
company's working. Management also uses various cost methods for evaluation of product cost.
Pavestone applies different planning tools for budgetary control and its forecasting. Management
take several accounting systems to resolve company's financial issues for achieving target.
TASK 1
P1: Management accounting and its types of management accounting systems
Management accounting involves in preparing and rendering timely financial and
statistical data to managers which helps in day to day operations and short period managerial
decision making. The objectives of management accounting are assistance in planning and
formation of future policies, helps in interpretation of financial data, controlling performance,
coordinating operations etc. The outcome of management accounting is periodic statements for
organisation's department managers and top management. Pavestone products are focusing on
creating trading bond with independently, privately owned construction's businessperson. Hence
it is important to evaluate company's performance by preparing financial statements so that its
business expand in future. This is done by proper use of several management accounting systems
to create impressive plans and decision to succeed in business objectives (Management
Accounting, 2015). Cost accounting, price optimisation, inventory management, job costing are
the main management accounting systems explained below:

Cost accounting systems: This accounting system is a process of determining product,
process and project cost with proper recording, classifying, analysing, interpreting and evaluating
costs linked with operations and formulating different courses of action for cost controlling.
Pavestone is constantly developing a range of pre cast concrete walling and paving product that
are distributing across the country to builders and landscapers. Therefore it is important for
Pavestone management to utilise their resources in effective way without any wastage. This can
be possible with proper use of cost accounting system that makes a framework for company to
deal against future uncertainty. Actual, normal and standard costing are the three different types
of cost accounting techniques. Actual cost of product like material, labour and marginal
overhead are computed under actual costing. Normal costing is based on actual direct cost and
budgeted overhead rate whereas budgeted material, labour and manufacturing overhead costs are
determined under standard costing.
Price optimisation systems: It refers to impressive management accounting system
which management should follow for optimum pricing policies and future growth. Pavestone is
importing, manufacturing and supplying product like stones, concrete and wants to follow price
optimisation system for creating a sensible pricing strategy that a customer is willing to pay for
their product because high product price offered by company may moves loyal customers
towards their challengers which is not fair for company. Pavestone implements this management
accounting system for increasing satisfaction level of customer and maximize their willingness
for purchasing their products. This system recommends alteration in price strategy which helps
in company's progress (Ding, Dekker and Groot, 2013).
Inventory management system: It is an effective accounting system which track
company's inventories through the portion or complete of it in a business operations. This system
covers management of everything from storehouse to shipping, production to retail and all other
inventory movement and its parts. FIFO, LIFO and weighted average are the examples of
inventory management system. Pavestone adopt this system guidelines for managing inventory,
maintaining their inflow or outflow invoices of production and sales. Company follows FIFO
inventory management system i.e. valuation on the basis of product first produced is sold first.
Company is innovating product and wants to maintain their position in the market. Hence they
follows this system for increasing their future product demand through getting availability of
product in warehouse.

Job costing systems: This system refers to assigning of manufacturing costs to one or
group of products which helps management in creating budget effectively. Pavestone is dealing
in two jobs like supplier of stone and concrete. Therefore manager have to considered both
product activities in production and their individual cost identification that create revenues in
future. Process, standard and contract costing are the example of different job costing systems.
Pavestone is applying process costing system for identifying their products manufacturing cost at
various individual levels. With the help of this costing system management set their performance
standards (Edwards, 2013).
P2: Different methods used for management accounting reporting
Management accounting reporting refers to preparation of management reports which
helps organisation in decision making process and it produces reports for organisation's internal
shareholders as opposed to external. Management accounting reports consist of organisation's
cash availability, sales revenues, present status of company's account payable and receivable etc.
Pavestone is a small size company and willingness to expand their marketplace with assistance
of maintaining financial reports like profit or loss a/c, balance sheet and statements of
shareholder etc. on continuous basis like monthly, quarterly or yearly. Performance reports,
account receivable, inventory and manufacturing reports, job cost reporting are the three
important reports which an organisation have to maintain for developing effective plans and
guidelines on the ground of report information.
Various management accounting reporting are:
Performance report: This report is created for evaluating company's performance which
involves collecting and distributing project details, communicating project development, usage
of resources and forecasting of project progress. It also evaluate company's current performance
within different departments. Pavestone is also prepare performance report for analysing its
performance at all levels of management and comparing actual production with budgeted and
necessary actions are taken place for their variations. Company set rules and responsibilities for
managers at individual levels so that their complete performance maximizes and it attract
stakeholders (Henri, Boiral and Roy, 2016).
Account receivable reports: This aging report created a date wise list non-paying
customers invoices and unused credit note. It is first tool used by collection department to
determine overdue invoices for payments. This report is important for Pavestone to get details

regarding credit customers, average collection cycle and information about name, date, invoices
detail of individual customers so that company know their collection period and determine bills
which are outstanding for payments. They also identify whether average collection period is less
or more than standard period. If companies collection period is less then its a tough situation for
them and they should decreases their sales practices and if collection period is more frequent
company can increases its sales practices (Christopher, 2016).
Inventory management reports: Inventory management is refers to blocked working
capital of organisation's materials. This reporting system doesn't directly helps in decision
making or managing operation but provides information about inventory which help managers to
take straight and sensible decisions in managing company's operations. Pavestone is an
expanding supplier of stone and concrete so they required to maintain adequate level of
inventory with accurate value of inventory and company finds this reporting method as very
valuable. Economic order quantity and ABC analysis are methods used for classification of
inventory management reporting. EOQ is best reporting method because it states that quantity
order which decreases ordering and holding costs of inventory.
Job cost reporting: This reporting system defines the costs that may be assembled by
various job. Cost of direct material, labour, equipments, subcontract etc. are tracked at their
actual amounts and print a standard job cost report in way to know total cost of a job by this
reporting tool. Managers detect expenses of a specific assignment related to present status of job
that evaluate job profitability. Pavestone motive of creating this report is to identify cost of
various job orders and also analysis recovery amount of investment that is consumed on the
product. This will give positive impact of company's performance (Hillier, Grinblatt and Titman,
2011).
M1: Evaluate the benefits of management accounting system and its applications
Management accounting system Benefits
Cost accounting system  It provides financial stability and
economic growth.
 It is production cost controlling system.
Price optimisation system  It helps in market levelling.
 It provides price feedback to

management.
Inventory management system  It improves internal linked
departmental systems and collaborate
process.
 It increases transparency in information
and improves delivery performance.
Job costing system  It accumulate manufacturing costs of
product.
 It reports under or over applied
manufacturing overheads.
D1: Management accounting system and its reporting are integrated within organisational
process
Company use various management accounting system and its reporting for proper
planning and effective control so that they increases their efficiency and maximizes profit.
Company uses its resources in such a way as optimum utilisation of resources that helpful in
dealing with unpredictable events which is risky in organisation performance. Pavestone uses
cost accounting management system as a cost controlling tool so that they focus on new
customers together with past customers and it also adopt inventory management system for
keeping records of inventory for productively enhancement and performance appraisal.
Pavestone prepare account receivable aging reporting that helps management in changing their
credit policies in order to prevent unpredictable events regarding due recovery.
TASK 2
P3: Calculation of cost using an appropriate technique
Cost: It is an amount that has to be paid by buyer to seller while purchasing a product. It
includes all the expenses incurred at the time of manufacturing a product. It is the monetary
value of material, time, risk, overheads and efforts. When Pavestone try to decide that how much
profit it can make for its product, it should set the right cost. Because setting the right cost for the
product is the key to earn maximum profits.

Pavestone is a stone and concrete supplier, so it should set such price for the product that
is easily acceptable for the customers. If the price is not right then customers won't buy the
product and there are many substitutes for each product so they may switch to another. It is the
total money that the organisation spend to produce the product (Humphrey and Miller, 2012).
Marginal costing: It is a costing technique and used to measure marginal cost. Marginal
cost is the total increase and decrease in the absolute cost of the production while producing
extra units. It is variable cost, and includes labour and material cost of additional units. This
technique helps the management to take decisions regarding production.
Absorption costing: It is the costing technique in which all the manufacturing costs that
are included in the production of the product, absorbed by the sales of the same products. It helps
Pavestone to determine faults in its production as it want to assure that, it will operate with
maximum efficiency. This method helps to enhance financial transparency.
Calculation of net profit by using marginal costing method:
Particulars Amount
Sales revenue = (selling price * no. of goods sold = 55 * 600) 33000
Marginal Cost of goods sold: 9600
Production = (units produced * marginal cost per unit = 800 * 16) 12800
closing stock = (closing stock units * marginal cost per unit = 200 *
16) 3200
Contribution 23400
Fixed cost ( 3200 + 1200 + 1500 ) 5900
Net profit 17500
Computation of net income by using absorption costing method:
Particulars Amount
Sales = (selling price * no. of units sold = 55 * 600) 33000
Cost of goods sold = (total expenses per unit * actual sales = 23.375 * 600) 14025
Gross profit 18975
Selling & Administrative expenses = (variable sales overhead * actual sales +
selling and administrative cost = 1 * 600 + 2700) 3300
Net profit/ operating income 15675
Break even analysis: It helps Pavestone to determine that what it need to sell, to cover
its cost of production. It is the state of no profit and no loss, earned or beard by the organisation.

It depends upon the fixed cost of the products. It is helpful in identifying the relation between
fixed cost and variable cost (Ismail, Ramli and Darus, 2014).
A. Total number of product sold
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
B. Calculation of breakeven point in accordance to sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution / sales * 100 30.00%
BEP in sales 20000
C. Calculation for getting desire profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety: It is the difference of actual sales and BEP sales. It is the reduction in
the sales that can occur before the break even point of Pavestone is reached. It shows the
difference of Internal value and market value of the product. It is the gross receipt earned after
the organisation pays all of its fixed and variable costs related to production of the goods or
services (Basel, 2012).
D. The margin of safety, if 800 products are sold
Actual sales in units 800
Break even sales in units 500
Margin of safety 37.5

M2: Various types of accounting techniques
Standard, marginal and historical costing are the several types of accounting techniques
which Pavestone adopted in order to determine it's net operating income. These techniques are
described below:
Standard costing: In this method company compare their standard information with
actual information to give details to the manager about variations in the information.
Marginal costing: In this method company calculate the additional cost of output unit
rather than budgeted output. This cost of output includes direct material, labour and variable
overheads.
Historical costing: It is the original cost of an asset which is recorded in company's
accounting transactions. It helps in distinguish the replacement cost and actual cost
D2: Data interpretation
As per the above computation, it is clear that marginal costing method will be more
beneficial for Pavestone as compared to absorption costing method. It's because of the growth in
profitability while using marginal costing method. While calculating net profits by marginal
costing method it results £17500 as profit and absorption costing method results £15675 as
profit. Thus, the difference of £9600 in profit comes due to the changes in variable cost. In Break
even analysis, the total number of units sold are 500 and total amount of sales revenue to reach
break even is 20000. If Pavestone want to earn minimum profit of £10000, Pavestone have to
sale 1333.33 units, margin of safety is 37.5 when 800 units are sold.
TASK 3
P4: Budgetary control and different types of planning tool and their advantages and
disadvantages used in budgetary control
Budgetary control- It is a financial process of managing incomes and expenditures. It is
used by Pavestone to compare actual incomes and expenses to forecasted. It is a method of
regulating budget of the organisation by keeping records of how much money it gains, spends
and needs and then applying changes to the budget if required. This method is used by Pavestone
to prepare budget for the future period and compare the same with the actual figures. This
comparison will help the management to find out the variances and help in passing fair
judgement (Jones, 2011).

Budgetary control process is a very simple process but all the steps have to be followed
by the organisation one by one. It includes various steps such as setting budget objectives to be
achieved by the organisation, proper organisation of budget, establishment of the budget centres,
preparation of budget manuals, appoint a budget controller, selection of budget committee and
specification of the budget period. All the steps are followed by Pavestone to prepare budgets in
an appropriate manner. There are three planning tools used in budgetary control. These tools are
explained below:
Forecasting tools: It is a planning tool that facilitates the management in its attempts to
contend the risk of the future, depending primarily on data from the past experience and present
analysis of trends. It is based on the management's education, cognition and opinion of
Pavestone. It is also used to determine customer demand in future for the products of the
organisation (Murray Lindsay, 2012).
Advantages Disadvantages
 It provides the valuable information to
the managers that helps managers in
decision making.
 Forecasting assures improved
utilisation of resources by revealing
weak field of business.
 It is never possible that it results
accurately.
 It is more complicated than helpful for
the organisation.
Contingency tools: It is used by Pavestone to be prepared for the possible event that can
happen in future. It is used in the situation when outcome of an activity is unpredictable. It is
implemented by the organisation to determine a future risk that have possibility to occur. It is
also used to know the result of the plan which is suddenly executed by the organisation. For
example if it increases the price of the product then what will be the reaction of customer to this
activity.
Advantages Disadvantages
 Helpful in distributing liabilities among
employees for each work.
 Helps the management to be prepared
for the uncertainty in advance
 This approach is rigid, it reacts slower
to the changes in the trends.
 It is very costly method to apply and
each type of organisation is not able to

use such type of tools.
Scenario tools: It is used by Pavestone to examine possible future consequences by
considering optional possible outcome. It is commonly implemented by the organisation to
estimate changes in the market position of the organisation. Mostly managers use scenario tools
in decision making process to determine the best way to maximize profits for the organisation
(Ogata and Spraakman, 2013).
Advantages Disadvantages
 It is used by financial planners of the
organisation to deal with future crisis.
 It is used to generate external
information of the organisation that will
be helpful in decision making.
 There are various challenges
management have to face while
implementing scenario tools.
 It takes too much time to execute and
organisations like Pavestone have low
budget to hire employees for particular
analysis.
M3: Uses and applications of planning tools for preparing and forecasting budgets
Planning tools are used by Pavestone to determine various factors like forecasting
customer demand, be prepared for the crisis that might have chances to happen in future. These
tools are very helpful in budgetary control these tools provide information according to past data
and future trends. These are also helpful in providing information of risk or uncertainty that can
occur in future. It also facilitates the decision making process of management help the managers
to take appropriate decision according to the situation. These tools are also help to set a budget
limit for each task so that funds can be utilized according to the requirement.
TASK 4
P5: Responses of management accounting system to deal with financial problems
Facing financial problems is a state where money or fund related problems affect the
performance of business. These problems can occur if the funds are not properly utilised by the
management of the organisation. Pavestone is facing such type of financial problems. These
problems are explained below:

Money management system is not proper: It is one of the financial problem that
Pavestone is facing. If the money management system is not proper then there is no accurate
information of funds. If funds are not properly maintained by the management then it is not
possible to form an effective budget. (Jones, 2011).
Lack of effective knowledge to the account handler: There is lack of knowledge to the
accounts department of Pavestone, this will affect the accounts and information mentioned in it.
There is no proper information of the accounts and other statements. Organisation have to train
its employees to deal with such problems.
Unexpected expenses: There are many unexpected expenses occur and the managers of
Pavestone have to invest fund in such type of expenses and this will also create financial
problems within the organisation. These expenses are not forecasted and happen suddenly and
the management have to use monetary resources to deal with the problem and it will create
shortage of monetary resources.
Extra expense on promotions: Pavestone is spending more money on promotional
activities and the promotions are not resulting good. Promotions required high money investment
and create financial issues in the organisation. It is good for the organisation to spend money in
promotions but only then when it results positively for the organisation and increases the sales of
the organisation (Qian, Burritt and Chen, 2015).
Receiving late payments from the clients: It is a big problem, that Pavestone is facing.
Late payments by the clients will affect the internal as well as external system of the organisation
because each activity require money and if there is no money in the organisation then it can stop
the production process. It is important to make good policies to receive early payments from
clients.
To overcome the above mentioned financial problems company is using following tools:
KPI (Key Performance Indicator): It is used by Pavestone to examine the performance
of business. It also demonstrates that how effectively the organisation is achieving its goals. As
its name shows that these tools are the indicator of the performance. There are two type of KPI.
These are explained below:
 Leading Indicators: These indicators help managers to predict significant modifications
in the economy. These are used to evaluate the result of the activity.

 Lagging Indicators: These are used by Pavestone to determine the success or the failure
of the project.
Financial governance: It is a method which is used by Pavestone to collect, monitor,
manage and control financial information within the organisation. Poor financial governance
creates many risks for the organisation such as, reduces confidence of investors, regulatory
penalties, poor decision making ability etc. It is used to control internal environment, form
proper financial policies that helps the organisation to overcome financial issues.
Benchmarking: It is used by Pavestone to determine improvements in the production
and to analyse the performance level of the organisation. It is helpful in gathering internal
information of business. If management have accurate information of business then, it can help
to identify the cause of issue and its easy to resolve the same.
Pavestone Airdri
 Benchmarking helps to compete with
competitors and to set a positive market
image.
 Financial governance is helpful in
proper utilisation of monetary
resources.
 KPI provides ability to attain
predetermined goals.
 JIT is used to reduce production time of
various products.
 It is helpful to keep a track record of
inventory.
 It is applied by the organisation to
increase efficiency and decrease waste
in production units.
M4: Management accounting can lead organisation to sustainable success in responding to
financial problems
Management accounting is very beneficial for Pavestone to deal with financial problems,
because there are various tools like KPI, financial governance and benchmarking to deal with
such problems. KPI is helpful in measuring performance of business and identifying such
factors, that are helpful in enhancing performance and also help to pass fair judgement regarding
the work. Financial governance is used to monitor financial information so that organisation can
deal with problems at the time they occur. Benchmarking is used to compete with competitors,
by setting positive image in the market (Napier and Haniffa, 2011).

D3: Planning tools respond appropriately to resolve financial problems
There are three type of planning tools that are used by Pavestone to deal with financial
problems. Those are forecasting, contingency and scenario. Forecasting tools are used to forecast
future demands and risks so it is also helpful while dealing financial problems because it can
forecast problems and help Pavestone to resolve it quickly. Contingency tools are facilitative in
estimating uncertainty for future and these tools can reduce financial issues by estimating them.
Scenario tools are used to figure out the market changes and these market changes can cause
financial problems, in such condition it is helpful in dealing with such problems.
CONCLUSION
From the above project report, it has been concluded that management accounting and its
reporting are very important for Pavestone because it helps in decision making process as well as
in budgetary control to overcome or resolve financial issues of the organisation. There are
various cost system that are used by the organisation to set a effective cost for the product to
maximise profits and minimize losses. Pavestone use planning tools in budgetary control to
minimize risk of uncertainty and to facilitate decision making ability. Those planning tools are
Forecasting, Contingency and Scenario. These tools are very beneficial for the business.

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Online
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