Management Accounting and its Applications

The assignment delves into the core concepts of management accounting, highlighting its significance in strategic decision-making. It examines various budgeting techniques, cost analysis methods, and performance measurement tools used by organizations to maximize profitability and minimize expenses. The document also discusses the role of environmental and carbon management accounting in contemporary business practices.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
(1) Importance of management accounting and difference between management and financial
accounting...................................................................................................................................3
(2) Classification of cost at Inmarsat ltd.....................................................................................4
(3) Variance analysis and type of variance.................................................................................5
(4) Different operational budgets and advantages of preparing them.........................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Management accounting is an important discipline of management and it is also an
important branch of accounting. In this report an attempt is made to understand various concepts
of management accounting. In this regard variance analysis is discussed in the report and its
different types are also explained. Along with this cost classifications are also explained in detail
in the report. At the end of the report, different type of budgets are explained and their
advantages are also described in the report.
(1) Importance of management accounting and difference between management and financial
accounting
Inmarsat plc is a UK based service provider of global mobile satellite communication
services. It provide mobile connectivity services on water, land and air. It has five operating
segments namely maritime segment, enterprise segment, which focused on energy, media and
other services. Its aviation segment focus on commercial aviation services. The last segment is
US civil segment which focused on civil and military services. There is great importance of
management accounting because it is a discipline that is used to measure company performance
regarding use of an available resources. Management accounting is used to evaluate firm costing
in terms of services it make available to clients which are government and others. Means that by
using management accounting costing of all components of firm product cost of production is
done. Hence, it can be said that by using management accounting concepts accurate calculation
of service cost done in systematic way. Without applying concept of management accounting it
is not possible to compute cost accurately. In management accounting there is a concept of
variance analysis under which different type of variance are computed (Kaplan and Atkinson,
2015). These variances help managers in identifying areas where company is not performing
well. Hence, management accounting help managers in identification of areas where they needs
to pay special attention in order to improve company performance.
Difference between management accounting and financial management
There is huge difference between management accounting and financial accounting. In
management accounting entire calculations are done related to company production units and
labors as well as materials. But in financial accounting calculation related to production is not
done and instead of this entry of all business transactions are done in company books of

accounts. The information in company books of accounts is used to prepare several type of
accounts and three financial statements (Zimmerman, and Yahya-Zadeh, 2011). Hence, it can be
said that both type of accounting goes in different directions. Management accounting is done by
the cost and work accountant whereas financial accounting is done by the accountant. This
means that in terms of profession also both type of accounting are different from each other.
Financial accounting is used to measure company profitability and its financial position at end of
the year. On other hand, management accounting is used to measure cost of production and
expenses made in terms of labors and raw material. On this basis it can be said that financial
accounting and management accounting both are different from each other.
(2) Classification of cost at Inmarsat ltd
In Inmarsat plc many types of cost occurred during production process and these costs are
classified as follows. Type- There are two type of costs namely direct and indirect cost. Direct cost is a cost
that refers to expenses that are related to the production process. Whereas indirect cost
refers to those expense that are not related to the production process. Purchase of raw
material is a best example of direct cost. In Inmarst plc strict emphasis is given on
controlling direct cost because if direct cost increased then firm earn low amount of gross
profit in its business (Herman, 2011). Addition to this firm does not have sufficient
amount of profit after paying all indirect expenses. Hence, it become necessary for every
organization to make sure that it is able to control or reduce its direct expenses. Expenses
related to sales and distribution expenses are the best example of indirect cost. Inmarsat is
focusing on reducing its indirect cost in order to earn more and more profit. It is taking
many steps that are generating economies of scale for the firm. By doing so firm maintain
stiff control on its indirect expenses. Hence, it can be said that Inmarsat is following a
cautious approach in its business. Behavior- On the behavior costs are divided in to three categories namely fixed, variable
and semi variable cost. Fixed cost is a cost that never change and remain static during life
time of the firm. However, when firm makes a fresh purchase of new fixed assets then
fixed cost for the firm increased (Baldvinsdottir, Mitchell and Nørreklit, 2010). Purchase
of land and building are the best example of fixed cost. On the other hand, there is a
variable cost which refers to the cost that never remain static and keep on changing

consistently. Material and labor cost are the best example of variable expenses. Apart
from this there is another cost which is also known as semi variables cost. These are the
costs whose some part remain fixed and some part remain variable (Bennett, Schaltegger
and Zvezdov, 2011). With passage of time changes are observed in variable component
of cost but no change is observed in fixed cost. Taking building on lease are the best
example of semi variable cost. Under this an individual pay a fixed amount to the lessor.
But as per terms and conditions of contract lessee is liable to bear to maintenance charge
of property that is taken on lease. Maintenance charge is a variable expense and lessee is
also liable to pay fixed rent. Hence, it can be said that rent paid is fixed cost but
maintenance charge is a variable cost. So, it can be said that lease is a best example of
semi variable cost. Functional- On the basis of functions costs are divided department wise (Ward, 2012).
There are different departments in the company like marketing, finance and HR etc. All
these departments of an organization makes an expenses which is a cost of operating
these departments at Inmarsat. Thus, this is different way of costing and under same
costing is done on the basis of different departments. Expenses related to these
departments is a functional cost of these departments.
 Relevance- In terms of relevance costs are divided in to two categories material and
labor. Material cost is a cost that is related to material purchase and it is a example of
mentioned cost. On other hand, there is a labor cost that reflects costs that are related to
the employee’s of an organization that are involved in the production process of an
organization (Modell, 2010). labors working at facility are the examples of labor cost.
Hence, these are the relevant cost that incurred at Inmarsat plc.
(3) Variance analysis and type of variance
Variance analysis is a commonly used technique that is employed in order to evaluate
company performance in comparison to standard. This tool help in identifying the areas where
firm needs to make big improvements in order to improve its performance. The results given by
variance analysis formula is used to identify that firm give a strong or weak performance. This
technique help managers in performing control function and by using variance analysis firm
comes to know about the areas where it needs to make improvements in the business. Thus, this
technique is widely used in most of the business firms at a large scale. There are many types of

variance that are used by the business firms in order to measure their performance. Some of them
are as follows. Material usage variance- It is a variance that is used by the Inmarsat in order to identify
whether raw material purchased by the firm are used in efficient and effective way. Many
times in an organization during production process excessive raw materials are used by
the employees and due to this reason cost increases for the firm (Elbashir, Collier and
Sutton, 2011). Hence, this variance acts a as tool for the managers which is used to
identify whether employee’s are using raw material in systematic way as per requirement
of production process. If negative variance comes in existence then managers take some
of important steps in order to make sure that material usage will remain in control. The
main limitation of this mentioned variance analysis is that it can not be applied in the
service sector because in the mentioned domain production of goods is not carried out by
the firms. The main problem with materiel usage variace is that Labor rate variance- this variance is used to identify that firm make payment to labors at
extra rate or rate that was determined in the budget. On the basis of this variance
managers came to know about the deviation which may be positive or negative. With
change in business condition there may be a situation that may force firm to pay extra
rates to the labors (Lukka and Modell, 2010). If this technique will be used the it will
show negative variance because workers are paid at higher rate. But decision taken by the
firm are right from business point of view. Hence, variance analysis always does not
reflect firm poor or good performance and it is its major limitation.
 Labor efficient variance- It is a variance that is used to measure efficiency level of the
employee’s working at the production place. There may be many factor that may prevent
employee’s form giving their hundred percent output. If variance technique will be used
then it may show negative results. But the reality is that there are other factors that are
affecting efficiency level of the employees for which managers are not responsible. If
managers think that they failed to enhance productivity of employees then it is their
mistake (Gow, Ormazabal and Taylor, 2010). Hence, it can be said that each and every
decisions can not be taken on the basis of results produced by the variance analysis. It
only indicate the direction in which an organization needs to go.

(4) Different operational budgets and advantages of preparing them
There are different type of operational budgets and some of them are given below. Master budget- It is a a budget that cover many different type of budgets. In this budget
some of the budget are included namely cash budget, projected income statement and
balance sheet. In case of cash budget projections about cash inflow and outflow are made
by the managers of Inmarsat plc (Burritt, Schaltegger and Zvezdov, 2011). Thus, its main
advantage is that managers will make expenses and keep same in control by strictly
following projected expenditures of cash budget. Whereas, in projected income statement
forecasting is done about enhancement in revenue and direct as well as indirect cost. This
acts as target within which firms needs to make all expenditures and it is main advantage
of preparing projected income statement. Hence the main advantage of preparing this
budget is that firm the know the direction in which it needs to go in order to achieve
organization objective. Financial budget- This budget reflects the income earned by the firm from sales and
other sources. It also reflects the expenses will be made by the firm in purchasing land,
plant, machinery and equipment. The main advantage of this budget is that it determine
the revenue that firm needs to earn in order to expand business as determined at the time
of preparing a budget (Garrison, and et.al., 2010). Hence, Inmarsat plc prepare a plan that
will help it in earning determined amount of revenue from sales. Thus, this budget gives a
strategic direction in which an organization needs to go in order to achieve objectives.
 Static budget- It is a budget that remain unchanged even business conditions get changed.
The main advantage of this method is that in static budget minimum targets can be set by
the managers in terms of expenses of sales and distribution expenses and direct as well as
indirect cost. Managers of Inmarsat have to achieve these targets in each and every
condition (5 Types of budget for business. 2016). A rule can be made that if managers
failed to achieve determined results then strict action can be taken against them. This will
acts as motivating factor for mangers and they will make their best efforts in order to
achieve Inmarsat objectives. Hence, it can be said that this budget is beneficial for an
organization.

CONCLUSION
On the basis of above discussion it is concluded that management accounting is very
important discipline and by using management accounting concepts firms can control their
production cost. Hence, managers must time to time should use various techniques of
management accounting. It is also concluded that managers must prepare budget and they must
try to achieve determine results. By doing so profitability of the company can be maximized and
cost can be minimized.

REFERENCES
Books & journals
Baldvinsdottir, G., Mitchell, F. and Nørreklit, H., 2010. Issues in the relationship between theory
and practice in management accounting. Management Accounting Research. 21(2). pp.79-
82.
Bennett, M., Schaltegger, S. and Zvezdov, D., 2011. Environmental management accounting. In
Review of management accounting research . Palgrave Macmillan UK.
Burritt, R.L., Schaltegger, S. and Zvezdov, D., 2011. Carbon management accounting:
explaining practice in leading German companies. Australian Accounting Review. 21(1).
pp.80-98.
Elbashir, M.Z., Collier, P.A. and Sutton, S.G., 2011. The role of organizational absorptive
capacity in strategic use of business intelligence to support integrated management control
systems. The Accounting Review. 86(1). pp.155-184.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting.
Issues in Accounting Education. 25(4). pp.792-793.
Gow, I.D., Ormazabal, G. and Taylor, D.J., 2010. Correcting for cross-sectional and time-series
dependence in accounting research. The Accounting Review. 85(2). pp.483-512.
Herman, R.D., 2011. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lukka, K. and Modell, S., 2010. Validation in interpretive management accounting research.
Accounting, Organizations and Society. 35(4). pp.462-477.
Modell, S., 2010. Bridging the paradigm divide in management accounting research: The role of
mixed methods approaches. Management Accounting Research. 21(2). pp.124-129.
Ward, K., 2012. Strategic management accounting. Routledge.
Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control.
Issues in Accounting Education. 26(1). pp.258-259.
Online
5 Types of budget for business. 2016. [Online]. Available through: <
http://www.fool.com/knowledge-center/2015/09/08/5-types-of-budgets-for-
businesses.aspx>. [Accessed on 21st March 2016].