Management Accounting and Control Practices

The assignment provides an overview of management accounting and its practices, including absorption costing, operational budgets, and benchmarking. It highlights the role of innovation in the evolution of management accounting and its integration into management control. The document also discusses industry context and how it shapes management accounting practice.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Management accounting and different types of management accounting systems.....................1
Different methods used for management accounting reporting..................................................2
Benefits of management accounting systems..............................................................................3
TASK 2............................................................................................................................................4
Preparing income statement by undertaking both absorption and marginal costing system.......4
TASK 3............................................................................................................................................7
Explaining the advantages and disadvantages of different types of planning tools which are
used in budgetary control.............................................................................................................7
TASK 4..........................................................................................................................................10
Evaluating how planning tools help in resolving financial problems and thereby lead
sustainable success.....................................................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting refers to presentation of accounting information in the form of
reports that will help the management in performing its day to day activities. Management
accounting helps the management in formulating policies. Jupiter PLC will be included in the
assignment to perform its various task. It is a medium sized manufacturing company. This study
will include management accounting and different types of management accounting information.
Furthermore, it will include different methods of management accounting reporting. Also, it will
provide benefits of management accounting systems and their application to Jupiter PLC.
Moreover, this study will include marginal costing and absorption costing. It will include the use
of planning tools in management accounting and use of management accounting to respond to
financial problems.
TASK 1
Management accounting and different types of management accounting systems
Management accounting is a branch of accounting in which accounting information is
provided to management in order to increase profitability of firm and reducing the losses. It
refers to accounting information to management to make proper decisions to improve various
operations of organisation.
Different types of management accounting systems: The following are the various management
accounting systems which assist in providing information to management. Cost accounting system: It is a system used by organisation to estimate the cost of its
products and services to determine the profitability and also assist in controlling the cost
of product to increase profitability. Cost accounting system include fixed cost and
variable cost which are used to identify the total cost of product. Fixed cost is a cost of
production that remains constant over the period and it does not change with the change
in volume whereas variable cost changes with the change in volume (Chenhall and
Moers, 2015). Cost accounting systems consist of Job order costing and process costing.
Job order costing is that technique in which the manufacturing cost is divided separately
for each job. Process costing refers to accumulating manufacturing cost separately for
each process. Cost accounting system is used by Jupiter PLC to determine the
profitability of the firm by estimating the cost of its products.
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 Inventory management system: It is system used of manage the level of inventory in the
organisation in order to utilise the resource in the proper way to reduce maintain stock
level according to the demand of customers. Inventory management system assist in
controlling the flow of inventory to reduce misappropriation of stock. Inventory
management perform functions such as creating purchase orders, sale orders, print
barcode labels etc. Inventory management system include FIFO and LIFO method for
valuation of inventory. According to FIFO method, the first inventory which is purchased
is the one to be sold first. LIFO method assume that the first inventory which is
purchased is the one to be sold at last. This system is used by Jupiter PLC to control the
stock level by utilising resources in the effective way.
 Job costing system: It provides information relating to cost of specific job. It helps in
allocating the cost to particular job in the process of production of product. Job costing
system provide information relating to direct material, direct labour and overhead cost.
Direct materials are those materials which are consumed in the produces of production
and can be identified with the product (Dekker, 2016). Direct materials are listed in the
bills of materials. Direct labour involves the manpower used in manufacturing that
product. Overhead cost are the operating expenses which are incurred by organisation in
manufacturing that product. This system is used by Jupiter PLC to allocate the cost of
product to each job it helps Jupiter PLC in controlling the cost at each stage.
Different methods used for management accounting reporting
There are different types of management accounting reports which are used by
organization to determine the profitability and to make decisions to improve the performance of
organization. Budget report: This report is prepared by management in order to identify various
deviation in performance by setting the standards of incomes and expenses and then
comparing the actual incomes and expenses with budgeted to take necessary action to
improve the performance to organization (Fullerton, Kennedy and Widener, 2013).
Budget report contains information about actual and estimated figures and on the basis of
this report, management can take decisions to improve the performance of organization. Accounts receivable aging report : This report is prepared to have understanding of
amount due from the customers to determine credibility of organization. This report assist
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in identifying about those customers which have not paid the amount due to organization.
It also assists management in identifying the bad debts. It also provides management
taking in various decisions about changes in credit policy of the firm.
 Job cost reports : This reports are prepared by management which shows the cost of
each job in order to compare them with the estimates of revenue to determine the
profitability of firm (Messner, 2016). Job costing report helps in controlling the cost of
each job by identifying the expenses and make decisions to control the cost by reducing
the expenses due to which of cost of production increases.
These reports are used by Jupiter PLC to measure the profitability of the firm. Budget
report helps Jupiter PLC in measuring the performance by comparing the actual with the
standards. Account receivable report helps Jupiter PLC in identifying the customers that have no
paid the amount outstanding to their account. Also, job costing report is prepared by Jupiter
_PLC to accumulate cost of each job to control the cost of the each job.
Benefits of management accounting systems
Management accounting systems helps the organization in increasing its profitability by
identifying various information which provide assistance to firm in improving their performance
on the basis of these reports.
Benefits of cost accounting system
 This system helps in measuring and improving efficiency of the organization which assist
in increasing profitability of firm.
 It helps in utilizing the resources of organization effectively and efficiently to achieve the
goals of firm and also assist in controlling the cost by reducing expenses (Otley and
Emmanuel, 2013). It also helps in making effective decision for increasing the profitability of organization.
Limitations of cost accounting system
 Cost is ascertained on the basis of full utilization of capacity and if cost is partly utilized
the cost determined may not be true.
 Financial figures are not included for calculation cost due to which the cost determine is
not correct always. Cost accounting systems require high expenditure.
Benefits of inventory management system
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 It helps in controlling over utilization of resources and maintaining the stock level
according to the requirements. This will assist Jupiter PLC in maintaining the stock level
according the demands of customers.
 This system helps in increasing profitability of Jupiter PLC By reducing the expenses of
maintaining stock (Ramanathan, 2014). This system also helps in tracking the inventory level and assist in reducing
misappropriation of stock.
Limitations of inventory management system
 Organization have to incur high expenditure for implementing this system in the firm.
 This system in difficult to understand due to which organization may face problem in
using this system.
 Inventory management system will require more information regarding future demand to
maintain the stock level.
Management accounting system and reporting integration with organisational process
Management accounting system and reporting are integrated with the organization
process as helps in determining the information of the various activities of the Jupiter PLC which
will assist in increasing the profitability of firm.
Integrated management accounting system and reporting helps in maintaining the stock
level according to demands of customers. It also helps in improving the various activities of the
Jupiter PLC.
Management accounting reporting helps in identifying the customer's information that
have their amount unpaid for the products and services provided by firm . This helps the Jupiter
Plc in modifying its credit policies.
TASK 2
Preparing income statement by undertaking both absorption and marginal costing system
Absorption costing: In the modern era, such method of costing is highly significant which
provides assistance in calculating the cost of product by taking into account both direct as well as
indirect expenses. On the basis of such costing method all the manufacturing costs are absorbed
by the units produced. As per this method, fixed and variable costs are apportioned to cost
centres where absorption rates are considered for the purpose of evaluation.
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Marginal costing: Under this, variable expenses are charged to unit cost and focus placed
on writing off fixed expenditures in against to the contribution. Marginal costing method
presents changes which take place in cost and profit when one additional unit is produced. Such
concept is undertaken by the companies, like Jupiter Plc, for determining optimum production
quantity in the context of business unit (Absorption Costing: Definition, Formula & Example,
2018). Hence, cost and profit assessment on the basis of absorption and marginal costing system
are as follows:
Absorption costing
Computation of unit cost
Particulars Figures
(in £)
Figures
(in £)
Direct labour
(DL) 20
18000 *
20 =
360000
Direct material
(DM) 10
18000 *
10 =
180000
Variable
overhead (VO) 5
18000 *
5 =
90000
Fixed overhead
(FOH) 5
18000 *
5 =
90000
Total
manufacturing
cost per unit
40
18000 *
40 =
720000
Budgeted profitability statement
Particulars Per unit (in £) Figures (in £) Total (in £)
Sales 50 800000
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Cost of
production
DM 10 180000
DL 20 360000
VOH 5 90000
FOH 5 90000
720000
Beginning
inventory
0
Less: Ending
stock
80000
Less: Cost of
goods
sold(COGS)
640000
Gross Budgeted
profit
160000
Less: Under
absorption
10000
Net standard
profit
150000
Actual P&L
Particulars Per unit (in £) Figures (in £) Total (in £)
Revenue 50 800000
Production cost
Material 10 190000
Labour expenses 20 380000
Variable
overhead
5 95000
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Fixed overhead
or expenditure
5 95000
40 760000
Stock at the
starting of
month
0
Less: Stock at
the ending of
September
120000
Less: COGS 640000
Standard profit 160000
Less: Under
absorption
5000
Budgeted profit 155000
Marginal costing
Income statement for Sep 2018: Budgeted
Budgeted Actual
Particulars Per unit
(in £)
Figures (in
£)
Total (in £) Per unit
(in £)
Figures
(in £)
Total (in
£)
Sales revenue 50 800000 50 800000
Cost of
production
DM expenses 10 180000 10 190000
DL expenses 20 360000 20 380000
VOH expenses 5 90000 5 95000
35 630000 35 665000
Opening stock 0 0
Less: Closing
stock
70000 105000
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Less: COGS 560000 560000
Contribution 240000 240000
Less: fixed
overhead
100000 100000
Profit in the
month of
September
140000 140000
Interpretation: By doing analysis, it has assessed that Jupiter Plc will get £155000 as actual
profit margin as per absorption costing method. On the other side, business organization will
generate £140000 as profit in accordance with marginal costing system. On the basis of
absorption costing total manufacturing cost implies for £40 respectively. Whereas, in comparison
to absorption, manufacturing cost as per marginal costing accounts for £35 significantly.
Referring all such aspects, it can be depicted that business should lay emphasis on employing
absorption costing system over marginal. Moreover, such method provides firm with suitable
view regarding cost and profit by assuming that fixed cost can be recovered through the selling
of products or services.
TASK 3
Explaining the advantages and disadvantages of different types of planning tools which are used
in budgetary control
Budgetary control is the process of comparing actual performance with the planned output
which in turn helps in assessing deviations timely. In other words, under budgetary control
business unit emphasizes on doing comparison of actual figures in against to the standards. This
in turn helps company in identifying areas where business unit failed to meet benchmarks
(Saladrigues and Tena, 2017). Thus, for the purpose of budgetary control following planning
tools can be used by Jupiter Plc such as:
Operating budget: This financial plan is developed by the company for making an
estimation about both income as well as expenditure. In other words, by preparing operating
budget Jupiter Plc can assess income which firm will generate over expenses during the specified
time frame. Such budget also gives input for making evaluation of actual income and expenses.
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Advantages
 Helps in managing expenses and making projection about future aspects
 Facilitates performance tracking (Pros & Cons of an Operational Budget, 2018)
Disadvantages
 It does not refer inflationary measure Time-consuming process
Cash budget: It may be served as an estimation of cash inflows and outflows associated
with the company in relation to the specific time period. Such budgeting framework helps in
assessing whether firm has enough cash for performing activities or not (Simons, 2013). By
using such budget Jupiter Plc can evaluate actual inflows as well as outflows and thereby would
become able to develop suitable monetary framework for the upcoming time period.
Advantages
 Assists management in concentrating their efforts pertaining to the significant matters
 Facilitates effectual co-ordination among the activities of all the departments within an
organization
 It provides helps to the higher management team of Jupiter Plc in handling monetary
resources more effectually
 Cash budget enables firm to exert control on cost and enhances profit margin
Disadvantages
 Success of such budgeting is highly depends on the co-ordination and co-operation of
staff
 Such budget is built on subjective aspects which in turn limits its significance Expensive to operate and highly time-consuming
Zero base budgeting: Jupiter Plc can also do planning pertaining to the usage of monetary
resources by using zero base budgeting technique. In accordance with such method, firm starts
with zero base and makes focus on assessing activities which need to be performed during the
specified time period (Suomala, Lyly-Yrjänäinen and Lukka, 2014). Along with this, business
unit makes effort in identifying all the alternative practices through which business activities can
be carried out in an effectual way. Hence, by following such process Jupiter Plc can set suitable
budget and thereby would become able to make optimum use of financial resources.
Advantages
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 ZBB facilitates accuracy and efficient allocation of financial resources as it does not
consider past framework
 Evolves better co-ordination and communication within the firm
 Assists in avoiding redundant business practices and thereby enhances profit level Considers inflationary aspect while setting financial framework
Disadvantages
 ZBB is time consuming process because in this each item of cash flow is evaluated
 For preparing budget as per ZBB company requires highly skilled manpower or
personnel Further, ZBB requires involvement of all the personnel working at different level while
setting budget
Responsibility centre: By building responsibility centre’s pertaining to sales, profit, expenses
etc Jupiter Plc can do planning for the control purpose. Such responsibility centre is accountable
to meet their goals and objectives (Ward, 2012). Hence, by taking input from the concerned
centre Jupiter plc can set standards for the upcoming time period.
Advantages
 Helps in setting suitable and realistic goals
 Make all the departments highly responsible
Disadvantages
 High standards negatively impacts departmental performance
 Affects innovation negatively
Analysing the use of different types of planning tools in the preparation and forecast of budget
In the context of Jupiter Plc, applicability of cash budget can be presented in the
following manner:
Particulars January February March April May June
Cash inflows
Sales revenue 30000 30900 31827 32782 33765 34778
other income 5000 5000 5000 5000 5000 5000
Sum of cash inflows 35000 35900 36827 37781.8 38765.3 39778.2
Cash outflows
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Direct expenses 10000 10150 10302.3 10456.8 10613.6 10772.8
Salaries 7000 7000 7000 7000 7000 7000
Other expenses 3000 3000 3000 3000 3000 3000
Administration and distribution
expenses 5000 5003 5005 5008 5010 5013
Total cash outflows 25000 25153 25307 25464 25624 25785
Cash deficit / surplus 10000 10748 11520 12318 13142 13993
Opening capital 15000 25000 35748 47267 59585 72726
Closing cash balance 25000 35748 47267 59585 72726 86719
The above depicted cash budget shows that in the upcoming month’s sales revenue of
Jupiter plc will be inclined by 3% respectively. Hence, cash inflows of Jupiter Plc will incline
from £35000 to 39778 respectively at the end of June. On the other side, it is estimated that
direct expenditure will be inclined by 1.5% significantly. Further, administration expenses of the
firm will also be increased over the period. Tabular presentation clearly shows that during the
period of six months losing cash balance of Jupiter Plc is positive and higher. Referring all such
aspects it can be mentioned that by taking into account previous framework prediction is done
about future.
TASK 4
Evaluating how planning tools help in resolving financial problems and thereby lead sustainable
success
In the context of business unit, manager faces several financial problems in relation to
shortage of funding’s, generation of undesirable sales revenue etc. Hence, there are several
techniques which can be used by Jupiter Plc for responding financial problems take place within
an organization such as financial governance, benchmarking, balance scorecard etc. Currently,
Jupiter plc is using balance scorecard technique which in turn recognized as highly effectual over
others. It enables firm to evaluate performance from several aspects and thereby helps in
developing competent framework for the upcoming time period. On the other side, NISA which
operates in retail sector prefer undertakes benchmarking technique for performance evaluation
and responding monetary problems. Hence, benefits and drawbacks associated with such
techniques are enumerated below:
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Benchmarking: In accordance with such tool, by comparing actual financial outcome with
benchmarks Jupiter plc can easily assess deviations. With the motive to get desired level of
outcome or success each company sets some specific benchmarks pertaining to sales, profit etc
(Benchmarking types, process, advantages and disadvantages, 2018). Thus, using benchmark
technique Jupiter Plc can identify deviations and thereby develop competent strategic framework
for the near future.
Advantages
 Fosters creativity within the business unit
 Enables each department to make their best efforts for achieving goals
Disadvantages
 Benchmarking is based on historic data set which in turn considered as less reliable
 At the time of setting benchmarks business unit consider competitors success. However,
manager avoids situation under which such goals are met. This is recognized as main
limitation because unrealistic benchmarks negatively impact employee performance.
Key performance indicators: For evaluating performance over the period business unit uses
some specific indicators regarding profit, expenses, market share etc. Hence, Jupiter Plc can
evaluate its own position by comparing current performance with predetermined KPI’s. Such
evaluation assists firm in setting suitable policies for the upcoming time period and thereby
avoids issue pertaining to financial deficiencies.
Advantages
 It offers opportunity in relation to measuring performance from both qualitative and
quantitative perspective.
 Gives input for doing long term prediction
 Helps in setting appropriate incentives for employees
Disadvantages
 Lack of standardization in setting KPI’s
 Does not give assistance in standards in line with the competitors
Balance scorecard: Such technique of MA is highly prominent which helps company in
measuring or evaluating performance from four perspectives such as customer, financial, internal
business processes as well as learning & growth. Hence, by doing evaluation on the basis of such
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four aspects firm would become able to assess loopholes and get desired level of outcome
through the means of competent framework.
Advantages
 Helps in aligning business strategies with goals
 Facilitates improvement in performance reporting and thereby decision making
Disadvantages
 BSC involves overwhelming work as it includes evaluation of several areas
 Too rigid in the context of management
CONCLUSION
By summing up this report, it has been concluded that management accounting systems are
highly significant which Jupiter Plc can use for managing internal operations in monetary terms.
It can be summarized from the evaluation that managerial accounting reports offer input and
thereby assists in decision making. Besides this, it can be inferred that manager of Jupiter Plc
should select absorption costing technique over marginal for the purpose of cost assessment. The
rationale behind this, such costing system presents suitable view of cost and profit margin by
taking into account the aspects of fixed cost. It can be depicted from the evaluation that by using
tools such as variance analysis and developing responsibility centres manager of Jupiter Pc can
ensure effectual budgetary control. Further, it has been articulated that by setting KPI’s and using
benchmarking technique Jupiter Plc can respond monetary problems in an effectual way.
Moreover, such techniques provide quick indication to the firm about loopholes and thereby
contribute in effectual decision making.
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REFERENCES
Books and Journals
Chenhall, R. H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, Organizations and
Society. 47. pp.1-13.
Dekker, H. C., 2016. On the boundaries between intrafirm and interfirm management accounting
research. Management Accounting Research. 31. pp.86-99.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2013. Management accounting and control
practices in a lean manufacturing environment. Accounting, Organizations and
Society. 38(1). pp.50-71.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.
Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control.
Springer.
Ramanathan, S., 2014. Accounting for Management: A Basic Text in Financial and Management
Accounting. Oxford University Press.
Saladrigues, R. and Tena, A., 2017. Cost accounting in Spanish and Catalan universities: Its
current status of implementation. Intangible Capital. 13(1). pp.117-146.
Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy
Text and Cases: Pearson New International Edition. Pearson Higher Ed.
Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A
reflective analysis of conducting interventionist research in management accounting.
Management Accounting Research. 25(4). pp.304-314.
Ward, K., 2012. Strategic management accounting. Routledge.
Online
Absorption Costing: Definition, Formula & Example. 2018. [Online]. Available through:
<https://study.com/academy/lesson/absorption-costing-definition-formula-example.html>
Pros & Cons of an Operational Budget. 2018. [Online]. Available through: <
https://accountlearning.blogspot.in/2010/11/advantages-of-standard-costing.html>.
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Benchmarking types, process, advantages and disadvantages. 2018. [Online]. Available through:
< https://content.wisestep.com/benchmarking-types-process-advantages-disadvantages/>.
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