Management Accounting Systems & Inventory

This assignment focuses on understanding various components of a comprehensive management accounting system. It explores the concepts of inventory management systems, cost accounting systems, price optimization techniques, and job costing methods. Students will gain insights into how these elements contribute to effective financial decision-making within organizations.

MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting systems......................................................................................1
P2 Methods of management accounting reporting.................................................................5
TASK 2............................................................................................................................................6
P3 Difference between income statement made through marginal and absorption costing...6
TASK 3 ........................................................................................................................................10
P4 Advantages and disadvantages of planning tools which are used for budgetary control10
P5 Adopting management accounting systems for responding financial troubles .............12
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................15
.......................................................................................................................................................16

Report
From: Management Accounting Officer
To: General Manager
Subject: To write a report to GM covering management accounting and management accounting
system together with different costing techniques and reporting to enable the organization
implement them.

INTRODUCTION
Management accounting is the process of recording and identifying financial as well as
non-financial data for making crucial decisions relating to investment and operational control.
Most of the enterprises face various kind of issues in their business because of changing external
environment and organisational policies (Cokins, 2013). Managerial accounting focuses on
increasing revenue by minimising wastage and finding new markets where investment can be
done for earning more profit. Earlier, companies were mainly coping up with financial problems
like maintaining right amount of cash in the firm etc. but now, complexity in doing business has
increased importance of management accounting because it does not only resolve troubles
relating to managing money but it also assist different departments of a company like marketing,
operations etc. Taj Store is a grocery shop in London. They are operating at low level but this
organisation was founded in 1936. This assignment will explain various types of management
accounting system along with their essential requirement. Some methods of management
accounting reporting will also become part of this report. Income statement will be made by
using marginal and absorption costing and difference between them will get discussed. Topics
like planning tools and adaption of management accounting systems will be explained at the end
of this file.
TASK 1
P1 Management accounting systems
Making right decision in appropriate time is a difficult task, most of the managers started
using various systems of management accounting because they know that this form of accounts
can resolve many issues relating to financial and non-financial problems. For a small company
like Taj Store, raising finds is not easy. They seek high amount of loan at low rate and try to
locate correct areas where investment can be made for attaining high returns. Financial
accounting can help in making significant decisions up-to a limit (Chen, Weikart and Williams,
2014). They mainly concentrate on recording of data instead of analysing them for the benefit of
managers. Difference between financial and managerial accounting:

Financial accounting Management accounting
It is made for external parties like shareholders
of company.
It is used by internal stakeholders like
employees, managers, senior board members
of the enterprise etc.
Historical data is used for making accounts and
delaying in normal in this form of accounting.
It is future oriented and formed in present time.
Reporting of whole organisation is done. Reporting of particular areas is done.
It measures financial records. Both financial and non-financial like
operational data is measured in it.
Making financial statements is compulsory for
limited company because of legal
requirements.
There is no legal binding for making any report
under management accounting.
Different managerial accounting systems are used by many small enterprises because of
various advantages. Small firms do not have much resources, they cannot afford wastage of
limited funds. Process of management accounts assist in finding the mistakes which managers
are repeating by using inventory control and price optimisation system (Burritt, Schaltegger and
Zvezdov, 2011). It decreases confusion among different division and reduces the time that is
taken for making a call. Costing accounting and job costing are some other kind of systems
which concentrate of techniques for minimising expenses on production. Below is complete
explanation of these processes:
Inventory management system – If an enterprise will keep more than needed good in
the warehouse then it will increase significant expenses like carrying cost. If number of
inventory is less than required then supply chain of company will hamper and customer will not
get desired good in needed time. Inventory management system is a software which is used for
tracking deliveries, available and sold stock. Significant method of EOQ (economic order
quantity) is used for finding the right time and quantity of making an order. This system plays
significant role in decreasing wastage of resources, it also assures smooth flow of business by

storing appropriate amount of goods in the warehouse (Aminbakhsh, Gunduz and Sonmez,
2013). Some organisation keeps record of products on the basis of margin. If an item earns more
profit to company then special attention will be provided on its supply and vice-a-versa.
Cost accounting system – It can be considered as one of the most important part of
management accounting system because it finds the ways for checking and stopping insignificant
wastages. It mainly deals with production unit but it has huge scope. Most of the managers use it
for analysing profitability of a product. Reducing direct labour cost and material expenses are
some of its prime area of focus.
Job costing – This is a different type of system where profit generation capacity of every
job is analysed. So, firm can increase the number of ''Jobs'' which are providing more benefit to
organisation and find various number of tasks that do not have an important contribution in
earning revenue (Ahmad and Mohamed Zabri, 2012). It is also related to production process and
normally used when customer have specific demands.
Price optimisation – Demand of an item is also affected by its price. This system of
management accounting determines the right rate of a product at which it should be available in
the stores. If value of goods is high then customer will not buy it, this will make negative affect
on revenue of organisation. If price is low then also enterprise has to bear loss because in this
situation, buyers are ready to pay more sum for same commodity. Price optimisation assist in
ascertaining appropriate rate of the product.

Management
Accounting
system
Inventory
management
System
Cost
Accounting System
Price
Optimisation
Job Costing

P2 Methods of management accounting reporting
Every organisation whether small or large, make different type of report for evaluating
the work which they have done in past. These documents are made for finding flaws in past
policies and analysing successful plans. Report depicts variance between actual targets and pre-
determined objectives. Various kind of management accounting reporting is as follows:
Inventory control reporting – This report is made for analysing whether the stock is
managed in the proper way or not and what are the areas which can be improved in upcoming
time so the major problems in relating to stock i.e. over and under-stocking can be resolved
without getting delayed (Delafrooz and Paim, 2011). This report shows how much goods are
present in the company in present position and what was the sale of enterprise is a particular time
period. Taj Store can adopt this method of reporting because it will help them in decreasing
ordering and carry cost and they can find the proper need of stock which should be present in a
specific time period in their stores. They are selling variety of goods, inventory control reporting
can support in finding expected quantity of good which customer may buy in forthcoming time.
This work can be done by checking past records and identifying old mistakes.
Accounts receivable reporting – Taj store is operating from a long time ago in London.
They are many permanent customer who buy good from them on credit basis. Account
receivable report is used for recording the amount of credit which company has to given to their
different debtors. This report shows money which debtors are going to pay to the organisation
along with the time period in which they are going to pay. Some firms makes this document on
weekly, quarterly or monthly basis while other keep their focus on the amount and instead of
considering time period they check the sum which every debtor owe to them. Taj Store will get
great assistance by making this report, on monthly or any other basis which suits them, because it
reduces amount of bad debts. If they will use this report in best way then they can find and make
strict rules for debtor are not paying money is committed time.
Performance reporting – Normally this report is created for analysing performance of
different division of a company. But Taj store is small organisation and they do not have any
department. This does not means that they cannot make and use this report. They can utilise this
document for finding the difference between expected work and actual performance of the

employees (Ekbatani, and Sangeladji, 2011). Mistakes done by worker can be recorded in this
report and details of their good work will also become part of this document. Manager will get
essential support from this report because it can tell them information about which employees
should get how much incentives and promotions in upcoming time.
Account payable reporting – This report provide details about the money which an
organisation has paid or will pay to their suppliers. Seller are important part of business and if
they will receive their payment in promised time then relation between company and suppliers
will always remain fine (Foster, Hart and Lewis, 2011). Like account receivable report, it can
also be made on the basis of time or amount. It depends on policy of firm. If Taj stores will make
this report then they can easily keep positive relations with their supplier and it can assist them in
getting timely delivery of the products along with some special discount. This report can also be
used for determining cash balance which may be required in next period.
Budget reporting – Budget is made for comparing difference between actual and
budgeted performance. Budget is the planning of income and expenditure for a particular period
of time generally one year. Budget report shows performance of complete organisation, not one
or two departments or employees. Taj stores will get necessary assistance from this report, they
can remove confusion from the mind of worker and synchronise their effort in attaining long
term goals of the firm. Formation of this report can be bit expensive but an enterprise can earn
various advantages from using this method as it covered whole organisation. Most of the
conflicts in the firm can get resolve if workers has complete idea about the resources which are
available to them.
TASK 2
P3 Difference between income statement made through marginal and absorption costing
Income statement in the document which reveal revenue earned by firm along with
expenditure done by them (Fullerton, Kennedy and Widener, 2014). In management accounting,
there are more than one method of making income statement also known by name of profit and
loss account. One is through marginal costing approach and other is through absorption costing.
Below is their proper explanation:

Marginal costing – In this method, fixed cost is taken on period basis and variable cost of
treat in normal way i.e. subtracted after contribution. When an organisation make some addition
unit of an item, then they have to spend extra money on manufacturing of this product. Direct
material, labour and overhead will be charged, in this approach, when they are actually incurred.
On the other hand, fixed expenses, selling and administration cost will be charged at the time of
their incurring (What is Budgetary control? 2017).
Absorption costing – This method is very different from above one. Whether the cost is
fixed or variable, it will be allocated on the basis of units sold. Some significant expenses like
selling and administration cost is not taken in account at the time of making income statement by
using this approach (Gaizauskas and Martinavicius, 2013). This is an old approach and it was
used in traditional accounting methods.
Difference between marginal and absorption costing is mentioned below:
Basis Marginal Absorption
Use It is used as a decision making
tool by managers.
It is utilised in external
reporting.
Accounting standards At the time of inventory
valuation, this approach cannot
be used according to the rules
of mentioned in accounting
standards.
International accounting
standards allow use of
absorption costing in inventory
valuation.
Fixed cost In this approach, fixed cost is
fully subtracted from the
contribution. It does matter
whether goods are sold in
present year or next year.
Fixed cost incurred on sold
goods are treated in this year.
Inventory valuation Variable cost of production is
used for inventory valuation.
Total cost is considered for
inventory valuation

Calculation as per Absorption costing.
Working notes:
Absorption costing
Working 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £2
Fixed cost £3
Total £16
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*16 = £1600
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £2100
Fixed overhead: £2000
Total £100(over absorbed)
Administration Cost: In this budgeted cost is £800 and Actual cost is £700
Selling cost: In this budgeted cost is £400 and Actual cost is £600
Net profit using absorption costing £ £
Sales
(-) Cost of Sales:
Opening stock
Manufacturing
Closing stock
(Under)/ Over absorbed fixed prod.
O/h
0
11200
(1600)
21000
(9600)
11400

Gross Profit
Less Expenses
Variable sales expenditure
Fixed administration expenses
Fixed selling expenditure
Over absorption
Net Profit
600
700
600
(100) (1800)
9600
Working 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production O/h 3
Variable production cost 14
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Net profit using marginal costing £ £
Sales value
Less: Variable costs
Opening stock
Manufacturing
Closing stock
Contribution
Less Fixed costs
0
9100
(1300)
2000
21000
(7800)
13200

Variable Production expenses
Administration cost expenditure
Selling cost
Net Profit
1300
600
3900
9300
Above income statements shows that absorption costing will be correct approach which
organisation should use for making income statement because by using this method, company
have earned a net profit of £9600 and by adopting marginal costing they will register net profit of
£9300. Difference of £300 is coming due to different treatment of fixed cost. In marginal
approach, complete fixed cost is subtracted for determining profit but in absorption, only the
fixed cost spend on goods which are sold in this year is taken. This mean that fixed cost in
marginal and absorption was different (Higgins, 2012). Other point is that, all the expenses done
on closing stock will be treated in next year but in marginal, it does not matter whether the goods
are sold or not, expenses done will be treated in present year. These were the two main reason
behind the variation. Because company will register high net profit from absorption costing and
it is allowed to use under under international accounting standards, this is the best approach for
organisation.
TASK 3
P4 Advantages and disadvantages of planning tools which are used for budgetary control
Budgetary control is a system where actual income and expenditure is compared to
budgeted one. It assist in checking that whether the plans are followed according to manager
expectation and the need of changes is plans is also identified for making more profit. Their are
various planning tools which can be used by Taj stores, some of the are mentioned below:
Cash budget – The prime reason behind making of this budget is that it provide
information about need of cash which is required on a particular period of time. All the plans
incoming and outgoing of cash is determined in this budget, if an organisation use their cash in
right way then they can smoothly run their business operations (Hirth, 2013).

Advantages – Cash budget reduces the risks of bad debt and make sure that company
receive their due amount in decided time and also pay due amount on committed day. It assist in
maintaining sound relations with various external stakeholder and assure unhindered business
operations.
Disadvantages – Accuracy of this budget is very low. Cash is highly fluctuating
component so finding its exact need in particular period is not possible. Cash budget is made by
utilising last year figures, this is an ineffective approach and planning of incoming and outgoing
of cash can be highly inaccurate.
Master budget – This budget is made for allocating various resources to different
division of the organisation (Financial Reporting Center. 2017). Instead of focusing on
individual target, this planning is done for attaining organisational goal. One can say that it is
addition of all the budget which is made in an enterprise.
Advantages – It assures optimum use of available resources. Master budget have ability
to decrease cost of business operations and it bring all the units of an organisation on same page.
It removes every kind of confusion which is present in employees of Taj store and show that
clear path which they have to follow in upcoming time (Lambert and Sponem, 2012).
Disadvantages – Their is no doubt that using this planning tool is very expensive. Taj
stores may not afford it because they cannot spend their limited funds on something which is not
important for them. They are a small firm and they can remove confusion without using a
complicated procedure.
Capital expenditure budget – Buying capital assets is not an easy task, this budget is
made for managing financial resources in a proper way so capital expenditure like buying new
machines or land, can be without creating huge burden of finance on the company. Plans relating
to borrowing of funds and long term loans is made under this budget. It does not matter whether
an organisation is big or small, capital expenditure budget is significant for everyone because it
decide whether an organisation will earn success or get fail upcoming time.
Advantages – This budget assist in understanding major risk associated with investment
decision. It also provide great help in finding which investment option will provide better return
to the company (Langevin and Mendoza, 2013). By making capital expenditure budget, expenses
done on various project can be controlled in better way.

Disadvantages – This budget is made for long term, making changing in it is not possible.
As mentioned earlier that it is made for a long period of time, the amount of uncertainty is high.
This mean that pans made in present time can become completely irrelevant in upcoming time.
Zero based budgeting – It does not matter whether previous budget is higher or lower,
new budget is made by analysing all the functions of organisations. Budgeting in this method
starts from the base of zero.
Advantages – This budget has high accuracy and it play significant role in the process of
cost reduction by allocating correct amount for all the organisational function. Taj stores is
running their business at small level so adopting zero base budgeting would not be very difficult
for them. They can reduce all the redundant activities by using this planning tool.
Disadvantages – It consume lot of time and requirement of manpower is also high in it.
Lack of expertise is another drawback of ZBB. If a small firm want to adopt this option then they
have to spend huge sum on training.
Activity based budgeting - In this method, past year records are completely ignored and
budget is formed by using activity based costing (Lavia López and Hiebl, 2014). Proper
evaluation of every activity is done and they are deeply analysed so resources can be allotted in
most efficient way.
Advantages – This budget eliminate all the insignificant tasks which are just increasing
cost of the business and does not support in increasing revenue of the company. This budget has
a feature of master budget i.e. it make good connection between all department and focus on
organisation as a whole.
Disadvantages – Activity based budgeting is complex and it consume both time and
money. Small organisation do not have to perform many functions, they may think that spending
heavy amount on something complex is not appropriate.
P5 Adopting management accounting systems for responding financial troubles
Their is no doubt the business environment is changing very fast and it has created many
financial and non- financial problem for the company (Maiyaki, 2011). Management accounting
system are capable of resolving complicated issues but an organisation should choose right
approaches at the time of using them. Taj store is using modern method of accounting but
Vectair holding is still working on old approach. Their comparison is mentioned below:

Taj store Vectair holding
Lean accounting has helped them in earning
competitive advantages on their rivals because
it minimising wastage of different resources
(Moser, 2012).
They are working on traditional approach and
using old methods which are simple but does
not give any extra edge over competitors.
Lean accounting is bit complicated compared
to old techniques of accounting and it take
more time in analysing data.
Traditional accounting is simple to use and it
does not analyse any information or data.
Making right and fast call is advantages of this
method.
They do not have such benefits.
Their are many updated soft-wares of lean
accounting.
Most of the records are maintained manually
(Nemet, Baker and Jenni, 2013).
Taj store may use latest techniques of working but this does not mean that they do not cope up
with financial issues. Below is some of the main financial problems and their solution:
Profitability – Every firm want to increase their profits. But increasing cost of operation
and high competitive market stop them for attaining this goal. They fail to manage their goods in
appropriate manner which increases total cost. This is one of the example of profitability issue
like increasing burden of debt (Parker, 2012). This problem can be solved by using inventory
control system and making inventory control report. Prior one will assist them in removing
troubles of overstocking and under-stocking.
Price maximisation – This financial problem is relating to determining a price which
provide greatest profit to the company (Qian, Burritt and Monroe, 2011). Price optimisation
system can find resolve this problem. It can provide in coming to price which is best for both
seller and buyer.
Cost efficiency – Cost accounting system can be used for decreasing cost of production
or operation. It is not necessary that every time cost is reduced by us reducing wastage, sometime
by increasing efficiency of the process, this target can be achieved in short period of time.

Performance and control – Controlling various business activity is difficult for managers.
They may not keep an eye on work of every employees of division. By making different type of
management accounting report, they can identify whether performance is good or bad and how it
can be controlled for getting better results in forthcoming time (Renz, 2016).
Besides these management accounting system and tools their are some other significant tools
which can be taken in account by Taj store for coping up with major financial troubles:
KPI (Key performance indicators) – They help in maintaining effectiveness at the time of
moving forward towards long term goals of the company. SMART tartest can set for solving
various financials problems like reducing debt (Weißenberger and Angelkort, 2011). Instead of
setting general aim, they should make specific target like decrease amount of debt by 10%.
Objective have to be measurable so it can be compared from past records and at the same time it
has to be attainable. A target can only be achieved if it is realistic. If Taj store will set a target of
reducing debt by 50% in month that it is unattainable and unrealistic. Setting a time limit like 3
years is essential so all the target can be attained. It put positive burden on organisation to
perform better.
Benchmarking – Benchmark s are the standards which is present in an industry. If Taj
store will set higher standards or even follow the one which are present in their operational sector
then they can face financial issues in an effective way. Benchmark assist an organisation is
maintaining a standard which can be reduce the impact unfavourable conditions of business on
the company.
Financial governance – Conducting internal audits and following all the regulation made
by government assist in identifying various financial issues at the point of their generation (Zoni,
Dossi and Morelli, 2012). This will assist manager in finding their resolution with registering
huge loss.
CONCLUSION
From the above report, it can be concluded that every firm should adopt various systems
of management accounting so they can run their business without facing much financial and non-
financial troubles. Both marginal and absorption costing has their own benefit an enterprise
should choose the option which provide them more net profit.

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What is Budgetary control? 2017. [Online]. Available Through:
<https://accountlearning.com/budgetary-control-objectives-advantages-disadvantages/>.