Importance of Management Accounting System

The provided text emphasizes the importance of management accounting in business organizations. It highlights how management accounting systems like balance scorecards, key performance indicators, and benchmarks help solve problems at the right time and respond to financial issues effectively. The assignment also references various books and journals that discuss individual differences in managerial accounting judgments and decision-making, material flow cost accounting, and the use of historical cost accounting. A summary is provided about the importance of management accounting systems in business organizations.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Management accounting and requirements of different types of management accounting...1
P2. Different methods use for management accounting reports.................................................4
LO2..................................................................................................................................................6
P3 techniques of cost and analysis of income statement through different costing techniques..6
LO4-.................................................................................................................................................9
P4 Planning tool which is used in management accounting and its advantages and
disadvantages..............................................................................................................................9
P5 company could use management accounting to response financial problem......................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Managerial accounting is the process of identify, analysing and measuring and
communicating all information to company manager that helps to take effective decision and
make strategy for achieving the organisation long term and short goals and objectives.
Management accounting is use for internal which use to evaluate cost of the product and
preparing budget. Present report is based on Unicorn, small sized firm, which provides customers
with retail products & services. Report will include management accounting concept, types and
methods used to prepare management accounting report. It also includes techniques of cost
analysis which is appropriate to prepare marginal costing and absorption costing of the company.
Tools of budgetary controls and its advantages and disadvantage also includes that organisation
use management accounting system to solving financial problems of the company.
LO1
P1 Management accounting and requirements of different types of management accounting
Management accounting is the provisions of accounting used by managers which help
them in decision making by providing important information. Management accounting help in
making important decisions by diversifying plan and performance management system.
It is basically the presentation of accounting information in such a manner that it helps in
formulating policies which has to adopted by management and also on day to day activities.
This accounting is done by managerial accountants observe and record the events which
are to be happen in the business and by considering all the needs of the business (Butler and
Ghosh, 2015).
Management accounting extended to three different areas that are:-
Strategic management
- It is something which helps in planning and implementing the strategies so that
organisational and individual goals can be achieved. This advances the role of management
accountant as following its management act a s strategic partner in the organisation.
Performance management-
In this type of area of management, it guides the managers to measure the performance of
the organisation and take effective decision making practices.
Risk management
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In this category, managers of Unicorn. are required to plan, measure, manage and report
any uncertain risk to protect the organisation from any severe damage and helps in achievement
of organisational objective(Caplan,2016). There main objective is looking towards the
unforeseen future and making those decisions which will affect the organisational future. The
knowledge of the management accounting can be generated from, various function of the
organisation such as efficient auditing, Informations management, valuation, pricing, logistics,
treasury etc.
There are different types of accounting system which plays a crucial role in the
organisation for effective and efficient performance of management accounting.
Each of these types is designed to provide the particular information based on the needs and
requirements of management, common types of management accounting are :-
Cost accounting system-
This is the system in which cost allocation or recording of the all the costs incurred in the
business so that it helps organisation to us this to improve their management (Christ and Burritt,
2015).
It is the process of recording, classifying, analysing, summarizing, and allocation of the
cost associated and generating different course of action to control the factors. It is required for
every company because manager can control the cost of the product which is essential to provide
goods at a reasonable price. It also helps to eliminate the inefficiency cost and wastage of
material that also leads to cost reduction.
Advantages
 1.Adaptability- managers appreciate the cost accounting as it is managed, adapted,
interlinked and can be implemented according to the changing need of environment.
 2. Ability to view data in different ways-it can be considered in three dimension forms
that is accounts, calculations, and reports which ca be manipulated and observed from
different angles.
Disadvantages-
 Complexity- cost accounting is complex in competitively with other accounting. A
constant adjustment is need to made which make the accounting difficult.
 Relevance on high skill talent – this accounting can only be performed by the managers
who have high and specialised knowledge in the field of cost accounting.
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 They have to receive a training so that they can put their best in to it.
Inventory management system-
1-Inventory management system is something which provides information about the continuous
updation of inventory or the goods of the organisation by combining the use of desktop software,
bar code scanners, printers, and mobile devices to streaming the inventory management (Ellul
and et.al., 2015). it is essential because it handle the carrying cost , ordering cost and raw
material cost that helps to reducing the cost and provide goods and services at the time of
demand. It build the image that leads increase market share and profit of the company.
Advantages-
 Reduction in costs- many business invest their money in managing the inventory and due
to this they were not able to perform their activities smoothly but using the best inventory
software will help organisation to reduce their cost of managing inventory and helps in
smooth functioning of the business.
 High efficiency- the management of inventory through using inventory software will
provide more accurate and reliable results and that can be use a d strong information for
further purpose.
Disadvantages
 Complexity- using inventory software is not much easy, special talent and knowledge is
required to have the right use of software. Thus, for the managers who are not familiar to
the software makes it difficult and complex for them to manage the inventory efficiently.
 Price- inventory management software is very expensive so sometimes company not able
to effort costly machinery so company face lot of problem in inventory management and
they can't produce product effectively and not able to minimising the cost of the product.
Job costing system-
This is the method of costing in which industries measured the production in terms of
completed jobs. Job costing records the actual labour and materials expenses for performing a
specific job (Guenther and et.al., 2015). There is hug requirement to UNICORNcompany
because company can ascertain the cost at every stage of job costing and profit can be
maximised. Job costing process done by past record that will reducing the cost.
Advantages
 Cost can be ascertained at any stage of completing the job.
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 Profit ascertained from each different job is known separately
Disadvantages
 High clerical work is required in maintaining detailed information of job costing.
 Due to execution of large number of jobs in the organisation accurate cost information is
not obtained.
Price optimization system-
price optimisation use as mathematical analysis that provide information to manager to
decide price at which customer can able to buy and willing to pay amount against the prodct.
(Hirsch, Seubert and Sohn, 2015). This method is also used to determine the price of the product
at which company will able to generate the minimum profit and can meet its objective . it is
essential to all company by using price optimisation company provide quality product at
reasonable price so that leads to customer base and increase profit of the comnpany.
Advantages
 it avoids the price competition which helps organisation to do not interrupt and change in
their policies.
 It helps in satisfying the need of customers and organisation as well.
Disadvantages
 Price optimization methods require organisation to attract the customers in different ways
as the price is not only the factor through which customers got attracted .
 This method sometimes resists the organisation for their further growth as they stick to
the one price of optimization.
P2. Different methods use for management accounting reports.
There are various methods used for management of accounting reports .It is necessary to
manage the accounting reports properly for the smooth functioning of the business.
Unicorn. is managing department of high and special skills through which they manage
the different accounting reports so that organisational goal can be achieved (Kokubu and Kitada,
2015). The information from accounting reports helps organisation to pertain the information
which is necessary for trimming the costs, rewarding the employees with high performance,
investing in goods with which Unicorn. will be able to achieve their financial goals or return for
their business.
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It depends on the project that which information is required and from which report it can be
obtained.
Business can generate the reports quarterly, half yearly, monthly, weekly, or even on
daily basis. Different types of reports be made in the organisation. Some of them are :-
1.Budget reports to analyse performance
Budget reports helps Unicorn. to analyse the business performance and also help the
mangers to analysed their individual departments performance so that they can control the cost.
The budget is completely based on previous year expenses and accordingly the budget for the
company is been set. If any business has over budget of their previous year and they don't have
an availability or option to trim the cost than for the next year they have to increase the budget
for their expenses which leads to smooth functioning of the business (Maas, Schaltegger and
Crutzen, 2016). The owners and managers also uses the budget reports to benefit their employees
from incentives. In this case the additional budget fund can be given out as bonuses to employees
for motivating them and meeting their financial requirements.
2.Account receivables Aging
Unicorn. also extend credit to their customers to retain them longer term and the account
receivable Aging reports helps in maintaining cash flow. This report breaks down the balance of
the customers how long they have owed. Most of the aging reports of the company have separate
columns for the invoices which are days late, 30 days late, 60 days late, 90 days late or more.
Company finds any problem related to collection process than can go through the aging reports
(Maskell, Baggaley and Grasso,2016).
Company have complete right and authority to tighten up the credit policies of the customers if
they are unable to pay their balance.
3.Job costs reports
Unicorn. invested some amount in specified project and the expenses of this report is
shown by the Job costs reports. They are generally matched with the revenue which was
estimated so that company can evaluate the profitability of the job which help the business to
find the higher profitable areas which they can focus more and additional efforts can be given to
that particular job instead of wasting the time and resources on the jobs which containing the low
profit margins (Otley, 2016). Through the job costs reports company can identify the expense of
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the project which is in progress so at initial level itself corrective measures can be taken if the
costs reaching out of the budget.
4.Inventory and manufacturing
The inventory and manufacturing report are used by Unicorn. when they are producing
and maintaining any physical inventory in their organisation so that they can make the
manufacturing process more efficient. These reports contain items such as inventory wastage,
hourly labour costs or per unit overhead costs (Wong, 2018). Company can than compare the
various assembly lines within the business to find out the areas which are benefiting more to the
company and they also decide to offer the bonus benefits to the departments which are
performing best.
LO2
P3 techniques of cost and analysis of income statement through different costing techniques.
Marginal cost- it is the cost which occurs by producing an additional unit of product, that
additional cost is said to be the marginal cost. It is basically the change in total cost due to
change in production of one additional unit.
Absorption cost- it is the managerial accounting cost which includes all the costs incurred
and assigned to the unit for its production. In simple terms it can be concluded as the cost of the
finished product will include the costs of Direct materials, direct labour, variable manufacturing
overhead and fixed manufacturing overhead.
Income statement of TSR pvt Ltd as per marginal costing technique (10000 units)
Particular
Amount
(£)
Amount
(£)
Sales 250000
Less: Marginal cost
Direct material 50000
Direct labour 30000
Variable manufacturing overheads 20000
Variable selling and administration expenses 30000 130000
Contribution 120000
Less: Fixed manufacturing overhead 40000
Fixed S&D overhead 30000 70000
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Net profit 50000
Profitability statement of TSR pvt Ltd according to absorption costing technique (10000
units)
Particular
Amount
(£)
Amount
(£)
Sales 250000
Less: Marginal cost
Direct material 50000
Direct labour 30000
Variable manufacturing overhead 20000
Fixed manufacturing overhead 40000 140000
Gross profit 110000
Less: Selling and administrative overheads
Variable 30000
Fixed 30000 60000
Net profit 50000
Calculation of cost per units
Particular Amount (£)
Direct material 5
Direct labour 3
Variable manufacturing overheads 2
Variable selling and administrative overheads 3
Unit sold 5000
Marginal costing technique: Profitability statement with regards to 5000 units
Particular
Amount
(£)
Amount
(£)
Sales 250000
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Less: Marginal cost of sales
Direct material 25000
Direct labour 15000
Variable manufacturing overhead 10000
Variable selling and distribution overheads 15000 65000
Contribution 185000
Less: Fixed manufacturing overhead 40000
Fixed S&D overhead 30000 70000
NP 115000
Profitability statement of TSR pvt Ltd using absorption costing technique (5000 units)
Particular
Amount
(£)
Amount
(£)
Sales 250000
Less: Marginal cost
Direct material 25000
Direct labour 15000
Less: manufacturing overhead
Variable 10000
Fixed 40000 90000
Gross profit (GP) 160000
Selling and administrative overheads
Variable 15000
Fixed 30000 45000
Net profit (NP) 115000
Computation of variance for TSR pvt Ltd
Particulars
Budgeted
Figures Actual figures
Variance
(budgeted –
actual) Variance %
Material cost 20900 22000 1100 (adverse) 5.26 %
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variance (adverse)
Material price
variance 2000 2200 200 (Adverse) 10% (adverse)
Direct labour
cost 15000 17680 2680 (adverse)
17.86%
(adverse)
Direct labour
hours 3000 3400 400 (adverse)
13.33%
(adverse)
Interpretation
From the above Income statemented through two different costing technique that is
marginal costing and absorption costing of Unicorn. Company it can be concluded that
absorption costing technique is much beneficial for the organisation as it is generating the higher
net profits comparatively from marginal costing technique. The absorption technique generates
net profit of pound 115000 whereas marginal costing techniques generates net profit of pound
50,000. Absorption cost is better than other costing techniques s it includes the total expenses
occurred on manufacturing one unit and it is also considered as full costing because it includes
fixed and overhead charges as well. The company has made the budget for the production of
units which consists of Material costs, Material price, Direct labour costs, Direct labour hours.
The addition of all these will result as actual cost occurred on manufacturing of one product.
The actual cost for material cost is pound 22000 and the estimated budget is pound 20900 than
the difference of 5.26% leads to adverse result that is TSR pvt Ltd has to pay more from what
they have actually planned.
Similarly, Direct labour cost's estimated budget was pound 15000 and actual expense
incurred is pound 17680 in which the difference of 17.86% is costlier foe the organisation.
The material price variance is budgeted by pound 2000 and the actual figure was pound
2200 which bring the difference of 10% adversely. Company needs to set the budget by
considering the actual expenses so that it does not get adverse for the organisation and they can
work smoothly.
Hence, from above income statement it can be concluded that absorption technique of cost-
cutting is better than another costing techniques as the net profit generated from the absorption
technique is pound 65000 more. The costing techniques plays a crucial role in the organisation as
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all the profits and margins are calculated according to the cost which has to be paid by the
organisation.
LO4-
P4 Planning tool which is used in management accounting and its advantages and disadvantages
All organisation uses planning tool in management accounting which helps to improve
performance, take effective decision and preparing strategy for accomplish the goals and
objective of the company. By using planning tool of management accounting Unicorn. company
can compete with competitors and build image in the market. Company adapt planning tools like
zero base budget, cash budget , sales and purchase budget, flexible and fixed budget and
incremental budget (Kokubu and Kitada, 2015).
Planning tools of budgetary control system
Zero base budget (ZBB)
zero base budget is also called as De Nova budget. While Unicorn. company preparing
the budget manager will not consider previous year data or budget because this budget begins
from the zero level. All expenditure and cost justify for every new period. Usually this budget
prepared by government sectors and non profit organisation.
Advantages
 zero base budgeting is important Unicorn. company can efficiently allocate to resources
according to needs and benefits of the company.
 This budget enhance coordination and communication within all department of company
that helps to take effective decision and achieving the goals and objectives.
 ZBB use for cost effectiveness because Unicorn. company's manager doesn't considered
previous year budget and also detect to inflation budget.
Disadvantages
 zero base budget is time consuming budget because Unicorn. company require more
research, analysis and attention to prepare budget (Maas, Schaltegger and Crutzen, 2016).
 For preparing this budget company require more manpower resources and knowledge so
it become costly for company.
Cash budget
Any company doesn't exist with cash so prepare cash budget is important for all
company. Cash budget helps to estimation of cash inflow and cash outflow of the company that
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can assess that Unicorn. company have sufficient cash for operations and meet out the obligation
of the company. If company have no sufficient cash for meet out the debt will give negative
impact on public. Cash budget provide financial position of the company at a particular time
period. Short term cash budget help to identify short term investment and earn interest. It also
helps in estimate future cash payments. Unicorn. Company also prepare long term cash budget
that helps to analysis the cash investment into fixed assets like machinery, building etc.
Advantages
 cash budget helps to reducing debt amount because Unicorn. company quickly forecast
the requirement of cash for meet out the obligation.
 It shows financial position of the company. If company's financial position is strong it
builds the image so that customer and investor can rely upon the company.
 It is best tool for profit maximisation and growth of the company.
Disadvantage
 cash budget only base on cash transactions so managers are not able take all decision by
analysing this budget.
 This budget is not accurate because it is based on cash collection and cash expenditure so
it is difficult to estimate to cash receive in future. This budget based on estimation rather
than facts.
Flexible budget
Flexible budget is a budget which changes due to change in activities over an accounting
period. This budget takes base line of current revenue and expenditure for production then
estimate changes in revenue and expenses based on output. Flexible budget is also called
variable budget. Unicorn. company time to time prepare flexible budget that helps to profit
maximisation (Ellul and et.al., 2015).
Advantages
 Variable budget is important for estimating seasonal expenses. Unicorn. company's
Manager can easily prepare budget according estimate customer needs and preferences.
 Company can easily forecast and estimate time to time changes that helps to meet out the
customer demands.
Disadvantages
 It time consuming budget because it is based on current change in production level.
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 Unicorn. company have to spend huge money for preparing flexible budget.
P5 company could use management accounting to response financial problem
Management accounting provide accurate information to take short term and long term
decision of the company that will helps to achieve goals and objective at the point of time.
Unicorn. company is also use management accounting for making strong strategies that helps to
solving problem, take competitive advantage and increase profits. Unicorn. company use
management accounting tools like balance score card, variance analysis , benchmarking and key
performer indicator.
 Balance score card- Unicorn. company prepare balance score card which manage to
performance strategy that helps to improve internal function performance to achieve
goals and objectives. It is important to overcome the financial problems like reduce debt
equity ratio and enhance profitability ratio and earning per share ratio that helps to build
image of the company . It is better use for management information and communication
and coordination. Company collect information and utilise it for take advantage of
competition. This score card also focus on operational process which analysis process of
manufacturing, shortage and wastage. So it will lead cost minimisation and product
timely reach to its customers (Maskell, Baggaley and Grasso, 2016). Company can make
strategy for customer satisfaction by providing better quality product at reasonable price.
It also includes financial data by using financial ratio, variance analysis.
 Benchmark- Unicorn. company set standard benchmark which is use to compare actual
performance of the company. According to benchmark company prepare strategies and
set target that would easy to achieve. Usually company set target like sales target, profit
target and production target. Benchmark allow comparing performance with other
company and set standard process and exception and monitor actual performance that
leads to create opportunities and take competitive advantage . Benchmark helps to
improve performance and practices of the company that will helps to improve financial
problems such as enhance profitability and reduce debt.
 Key performance index (KPI)- Unicorn. company used to measure performance of the
company at the multiple level. High key performance indicators show overall
performance and low key performance indicator focus on performance of employers in
functional department. Company make strategy by evaluating objectives of the company.
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Key performance indicator measure specific objectives, measure progress and process of
the company and set time frame that helps to enhance growth and profits of the company.
Effective performance will build image and enhance market share of the company that
will increase customers and investors. It solves financial problems like improve cash flow
and ratios , reduce borrowings and also impact on profits and growths of the company.
(Butler and Ghosh, 2015).
 Variance analysis- It is study of deviation between actual performance and standard
performance of the company if any variance that impact on business then manager will
have to take corrective action for reducing variance. It will reduce and increase
productivity that will increase in margin of the company (Caplan, 2016). Reasons for
deviation can be change in market conditions, manager take wrong assumption while
preparing standard budget. By evaluating material variance, labour variance and overhead
variance company can improve productivity and enhance profits so it will help to meet
financial problem like reduce production per cost , labour cost and increase profitability.
CONCLUSION
Management accounting concluded that managerial accountant applies his skills and
special knowledge to pertained information and to make policies of the organisation accordingly.
This accounting helps in formulating the policies which further help in achievement of
organisational objective. Management accounting is considered in the category of value creators.
It also summarised that cost accounting system and inventory management system can use for
preparing management accounting report that help to decide cost of the product and evaluate
margin. Budgetary control tools are important for planning, controlling and monitoring the
process so manager can take decision. Manager of the company compare actual performance
with standard performance if any variance found then take corrective action for achieve standard
goals. It included that management accounting system like balance score card, key performance
indicator and benchmark is important for solving problem at the right time and effective strategy
for response the financial problem of the company.
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REFERENCES
Books and Journals
Butler, S. A. and Ghosh, D., 2015. Individual differences in managerial accounting judgments
and decision making. The British Accounting Review. 47(1).pp.33-45.
Caplan, D., 2016. Managerial Accounting Concepts and Techniques.
Christ, K. L. and Burritt, R. L., 2015. Material flow cost accounting: a review and agenda for
future research. Journal of Cleaner Production. 108. pp.1378-1389.
Ellul, A and et.al., 2015. Is historical cost accounting a panacea? Market stress, incentive
distortions, and gains trading. The Journal of Finance. 70(6). pp.2489-2538.
Guenther, E and et.al., 2015. Material Flow Cost Accounting–looking back and ahead.
Hirsch, B., Seubert, A. and Sohn, M., 2015. Visualisation of data in management accounting
reports: How supplementary graphs improve every-day management judgments. Journal of
Applied Accounting Research. 16(2). pp.221-239.
Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management
perspectives. Journal of Cleaner Production. 108. pp.1279-1288.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.pp.237-
248.
Maskell, B.H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system
for measuring and managing the lean enterprise. Productivity Press.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014.
Management accounting research. 31. pp.45-62.
Wong, I., 2018. Managerial Accounting Strategies for Optimal Costs.
Online
Management Accounting – Meaning, Advantages & Functions. 2019. [Online]. Available
through:<https://cleartax.in/s/management-accounting>.
Types of Managerial Accounting Reports. 2018. [Online]. Available
through:<https://bizfluent.com/list-7609485-types-managerial-accounting-reports.html>.
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