Management Accounting: Importance, Internal Reports, Costing, Budgets, and Variance Analysis

This guide provides an in-depth understanding of management accounting, including its importance in decision-making, the use of internal reports for coordination, the calculation of costs in different areas of a business, the role of budgets in expense management, and the effectiveness of variance analysis. It also explores the interaction between these concepts and their impact on each other.

Accounting

Table of Contents

1. Management accounting
Management accounting is also called managerial accounting. It has main process of
providing financial information and resources to managers of an organisation for further taking
of informed decisions. It is for internal use to bring coordination in departmental functioning.
This includes the use of different systems to analyse internal workings and further preparing
reports so effective level decisions can be taken to get desired results. The activities generally
involved in the exercise of management accounting systems application are identifying,
measuring, analysing, interpreting and communicating (Chenhall and Moers, 2015).
2. Importance and effectively of management accounting for an organisation
There are large number of benefits associated with the application of management
accounting systems within an organisation. All such different levels benefits are defined below;
 This helps in analysing performance of different departments.
 This helps in determining deviations in performance as compared to standards.
 Correct application of systems further aid in building coordination within internal
departmental functioning (Hiebl and Richter, 2018).
 Application of management accounting systems aid in preparing reports that further use
by managers to made short term and long term decision makings.
 Regular usage of management accounting concept aid in improving internal strengths and
strengthening core working structure.
Internal reports
1. Differences between internal as well as external reports
Internal reports are those that contains important information related to different
departmental functioning that further disperse within inside people of business for improving
their knowledge and information about current working scenarios. The one special feature
associated with such reports that designed to be views and evaluated by individuals working
within an organisation such as employees at all different levels. There is no specific format
provided legally better to adopt one as easy to compare results (Kaplan and Atkinson, 2015).
External reports are those which are prepared for the purpose of distributing among the
outsider parties for providence of information organisation working and position in market such
as financial statements i.e. balance sheet, income statement and statement of cash flows. The

outsider parties uses this includes investors, creditors etc. These are needed to prepare on the
basis of the standards given by international authorities such as IASB (Kihn and Ihantola, 2015).
2. Significance of internal reports
This has importance in building of high level internal coordination among different
departmental parties. For ex., inventory report has contribution in designing of activities by each
department according to the nature of presence (Lavia López and Hiebl, 2015).
Costing
1. Number of Areas used for calculating a cost for a business
In case of introducing new product, below mentioned aspects are considered by an
organisation for calculating cost;
 Direct material
 Indirect material
 Labour
 Time
 Marketing in case uses during the period of production
The areas will be;
 Production
 Marketing
 Warehouse
 Transportation
2. Importance of costing for an organisation
Large number of benefits associated with point of calculating cost to a business (Maas,
Schaltegger and Crutzen, 2016). These are defined below;
 Help in limiting expenses
 Help to remove process that adding extras in cost
 Help on focusing alternative solutions i.e. brining of innovation

Budgets
1. Pro and cons of using budgets within an organisation
Particulars Budget
Advantages The main advantage of using budget is limiting unnecessary expenses
and aid effective level of funds allocation (van Helden and Uddin,
2016).
Disadvantages There is no possibility of getting correct predictions so creating
delays in future
2. Interaction between budgets and costing in the business
Costing and budgets having direct level of interaction with each other in business.
Managers of different department uses budgets to outline activities and framework of expenses.
They also uses same to limit expenses and elimination of activities that involves large amount of
expenditure or not having such relevance in working processes. Such interaction also has
contribution in finding of alternatives and innovations that aid in finishing work within
predetermined budget (Nitzl, 2016).
Variance Analysis
1. Effectiveness of Variance analysis
Variance analysis is the exercise of identifying deviations as compared to the standards.
This exercise has huge amount of relevance in all different areas of business including staff
performance. For ex., this aid in determination of deviations in staff performance as compared to
provided standards along with possible causes so further preventive measures can be taken to
eliminate such causes. This also help in identifying the nature and skill of each different
employee where able to manager is able to design and provide tailored training program for
further improvement of personality (Otley, 2016).
2. Interaction between budgeting, costing and variance analysis in an organisation and affects
over each other
All the three costing, budgeting and variance analysis having direct level of interact with
each other in business. Budget help in limit expenses and complete work with determined

costings. Exercise of variance analysis help in identifying and removal of deviations for
completing work as per predetermined standards and costings. Issue in exercise of variance
analysis impacts costing while issue in budgets impacts the both costing and variance analysis
because standards are itself not correct to guide management towards right direction (Sands, Lee
and Gunarathne, 2015).

REFERNCES
Books and Journals