Management Accounting Systems and Tools

This assignment provides a detailed overview of management accounting systems and tools. It explores the role of marginal and absorption costing in determining profit, as well as the use of variance analysis to identify inefficiencies in business activities. Additionally, it discusses the importance of benchmarking and other planning tools in helping businesses develop strategies for financial performance enhancement.

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“Business”

TABLE OF CONTENTS
TASK 1............................................................................................................................................3
P 3 Preparation of income statement and calculation of cost of production using marginal and
absorption costing techniques.....................................................................................................3
TASK 2............................................................................................................................................8
P4 Advantages and used disadvantage of different type of planning tool for budgetary control
.....................................................................................................................................................8
P 5 Evaluation of management accounting system as to responding to various financial
problems....................................................................................................................................10
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

TASK 1
P 3 Preparation of income statement and calculation of cost of production using marginal and
absorption costing techniques
Calculation of opening and closing inventory using fifo method
Particular Opening Production Sales Closing
Year 1 0 40000 36000 4000
Year 2 4000 48000 4000
36000 12000
Year 3 12000 51000 12000
48000 3000
Calculation of cost per unit for year 1
Marginal Absorption
Direct labour 16 16
Direct material 12 12
Direct variable expenses 20 20
Fixed overheads 1.6
Total cost 48 49.6
Income statement using marginal costing method (year 1)
Particular Amount Amount
Sales 2520000
Less: Cost of sales
Opening stock 0
Production cost 1920000
Closing stock 192000 1728000
Contribution 792000
Income statement using absorption costing method (year 1)
Particular Amount Amount

Sales 2520000
Less: Cost of sales
Opening stock 0
Production 1984000
Closing stocck 198400 1785600
Gross profit 734400
Less:
Selling and distribution
overheads 10000
Administration overheads 15000 25000
Net profit 709400
Less: Interest expenses 1000
Net profit after interest and
taxes 708400
Calculation of cost per unit for year 2
Marginal Absorption
Direct labour 16 16
Direct material 12 12
Direct variable expenses 20 20
Fixed overheads 1.33
Total cost 48 49.33
Income statement using marginal costing method (year 2)
Particular Amount Amount
Sales 2800000
Cost of sales
Opening stock 192000
Production cost 2304000
Closing stock 576000 1920000
Contribution 880000

Calculation of cost per unit for year 3
Marginal Absorption
Direct labour 16 16
Direct material 12 12
Direct variable expenses 20 20
Fixed overheads 1.255
Total cost 48 49.255
Income statement using marginal costing method (year 3)
Particular Amount Amount
Sales 4200000
Less: Cost of sales
Opening stock 576000
Production cost 2448000
Closing stock 144000 2880000
Contribution 1320000
Income statement using absorption costing method (year 3)
Particular Amount Amount
Sales 4200000
Less: Cost of sales
Opening stock 591058.82
Production 2512000
Closing stock 147764.71 2955294.11
Gross profit 1244705.88
Less: Selling and distribution overheads 11000
Administration overheads 15000 26000
Net profit 1218705.88
Less: Interest expenses 1500
Net profit after interest and taxes 1217205.88

From the analysis of above calculations, it can be evaluated that in marginal costing
method measures the profit in terms of contribution whereas, the absorption costing measures the
cost in terms of net profit. Further, while calculating cost per unit in absorption costing, fixed
production cost is also taken into account, which is not considered in the cost per unit under
marginal costing method.
Analysis of the above calculation is also interpreting that the marginal costing income
statement provides higher amount of profit than the absorption costing income statement. The
difference is arisen due to exclusion of all the fixed costs in the marginal costing method.
Marginal costing method:
Marginal costing method is a method used in the marginal accounting system in which all
the variable costs are charged to the product cost (Hieu and Dung, 2018). Further, the fixed costs
are treated as period cost.
Absorption costing method:
Absorption costing system is a technique in which each production cost including direct
and indirect production costs are considered as product cost and taken into account while
calculating the cost of production as well.
Difference between marginal costing and absorption costing method:
Key difference between these two methods are as under:
Basis Marginal costing Absorption costing
Meaning It is the management accounting
technique through which the
managers can take decisions
regarding ascertainment of cost and
determination of fixed and variable
cost as well.
Absorption costing is a technique
with the help of which managers can
allocate the cost among various cost
centres and determine the total cost
of production as well.
Profitability Marginal cost provides higher amount
of profitability to the business.
Profitability of the business is
recognised comparatively low in this
method.
Measurement Profit is measured as contribution in
this method.
In absorption costing method, the
profit is measured as net profit for

the year.
Cost per unit Fixed production overheads are not
taken into account while calculating
cost of production(Difference between
Marginal and Absorption Costing,
2018).
Fixed production overheads are also
considered while calculating the cost
of production in absorption costing
method.
Classification of
overheads
Overheads are classified on the basis
of fixed and variable cost in this
method.
In the absorption costing method,
overheads are classified as
production overhead, selling and
distribution overheads,
administration overheads, etc.
Usage Income statement of marginal costing
system are used by the managers in
their decision making process.
Income statement made through
absorption costing method are used
for the purpose of external reporting
by the business.
Inventories Inventories are valued at the total
variable cost of production of the
company.
In this method, inventories are valued
at tota production cost incurred by
the business. Which results in higher
amount of inventory comes higher as
compare to the marginal costing
system.
Use of marginal costing in the business:
Marginal costing technique is adopted by the business organisations as it helps the
managers in their decision making process. Key usage of the marginal costing techniques are as
under:
 Planning for profit: profit planning can be defined as planning for the purpose of
predicting all the future operations of the firm so that the company could generate the
maximum amount of profit from its business operations (Christian, 2018). In the marginal
costing method provides information about the contribution of the business through

which managers can easily determine the change in sales and marginal cost, selling price
over the year which are helpful in predicting the future cost and profit of the business as
well. In this regard, marginal costing technique helps the managers as a planning tool.
 Decision making process: The contribution of the business is the key measure for ther
managers, as with the help of it, they can determine the production mix, sales mix,
variance in sales and marginal cost, etc. all these elements are the major elements
required by the managers in their decision making process.
 Cost control: With the help of marginal cost statement, managers can easily determine
the cost related performance of the business, through which they can make more effective
strategies sand plans for controlling the overall cost of the business. In this regard, the
marginal costing system can be used in the cost controlling procedure by the managers
(Jermias, 2017).
In this regard, it can be analysed that the marginal costing technique is useful for the
managers in performing various managerial functions.
Reason behind difference arisen in the profit or loss under marginal and absorption costing
method
From the analysis of above calculation and study it can be evaluated that both marginal
costing and absorption costing provides different amount of profit. Key reasons behind this
difference are:
 In both marginal costing and absorption costing, there is a difference in calculation of
closing stock. Which h arises the difference in cost of production and hence in the profit
as well.
 Further, while preparing the income statement under marginal costing system, the fixed
cost are not taken into account (Fisher and Krumwiede, 2015). On the other hand, each
cost incurred by the business while manufacturing the products are taken into account in
the absorption costing method. Due to this method, total cost differs in both the methods.
It directly results in occurrence of difference in the profit of the company as well.
TASK 2
P4 Advantages and used disadvantage of different type of planning tool for budgetary control
Budgetary control is a process for the managers to set the financing performance goals
with the help of budgets and compare them with actual performance and make adjustments

where ever required. The planning tools are various types of budgets which assist the process of
budgetary control.
Cash budgets:
Advantages:
 This budget assist in avoiding the debt with setting out the emergency situation which can
arise in the future.
 It helps in identification of the potential deficits as it determine the ability of the business
to meet its immediate cash obligation.
Disadvantages
 The actual availability of cash limits the spending power of the business.
 This budget also causes distortions as the cash flows never match with the profits.
Variance Analysis:
Advantages:
 Assist in finding the remedial actions with compression of actual and budgeted
performance.
 This helps in fixation of responsibilities for an individual, department of the business.
Disadvantages:
 Takes long time to examine the effect of variance and hence the correction actions get
delayed.
 The level and reason of inefficiency in the performance is not determined by this budget.
Pricing strategy
Advantages:
 This assist the organisation to set the prices of product as per the will of the consumers
which they are ready to pay.
 This makes the good appealing to consumers while covering its cost.
Disadvantages:
 This can make the price non appealing to consumers leading to their dissatisfaction.
 The prices can be set such which do not provide the organisation the income which it
requires.

Fixed budget: fixed budget is also known as static budget and is an essential tool to
measure the success of the business. The fixed budgets records all the financial a responsibility
when making the small and large expenditure for the business.
Advantages:
 Allows business to measure both long tern as well as short term budgets. The fixed budget allocates a set amount of money towards essentials such as overhead
cost.
Disadvantages:
 It operates at one level of activity only.
 Do not do consider the significance difference in the activity level.
Flexible budget: is the one which adjust and make changes in the volume to the activity.
This is more sophisticated and useful as compared to the static budgets, it takes into
consideration the changes in the activity level.
Advantages:
 Considers the actual changes in the volumes and activity level. The outcomes are always reals and positives as the actual volume is considered than the
planned one.
Disadvantages:
 Does not take into consideration the actual expenses as when the sales changes cost of
production also changes but the expenses do not change leading t to vary the selling cost.
Incremental budgets: is prepared by using the figures from actual previous data and it is
a traditional method of making the budgets (Incremental budgeting, 2018). This includes slight
changes in the earlier budget of the organization.
Advantages:
 Based on previous financial record so it is very simple to prepare. This require funding form data of multiple years to achieve a specific outcome, therefor
ensure the flow in the budgets.
Disadvantages:
 Only minor changes from the preceding period so actual figures are not considered.
 Managers tend to build too little revenue growth and excessive expenses into incremental
budgets.

Zero based budget: Zero base budgeting is recognized as method of budgeting in which all the
expenditures are justified for each accounting year. Such type of budgeting procedure starts with
Zero as base. It can also be considered to be as management accounting which includes
preparation of budget from scratch. Such type of budget emphasizes on preparation of new
economic proposal, where the revaluation of all tasks are being done. Zero based budgeting
assist manager in identifying the cots effective way of improving activities.
Advantages
 it is flexible and emphasizes on operations. Makes the budges from the scratch.
Disadvantage
 There is high chances of resource intensiveness.
 It is not effective for short term planning.
Variance analysis: is a technique which determines the gap between actual and budgeted
outcomes of the organization (VARIANCE ANALYSIS, 2018). This difference found out is
significant and material to the performance of the firm.
Advantages:
 it is very simple and act as a standard to attain the budgeted performance. This responsibly assist them managers in the performance analysis.
Disadvantages:
 This does not consider the forces of market changes in the analysis.
 The decisions of the departmental wise managers can lead to more consumption than the
actual and this raw information do not taken in account in the analysis.
P 5 Evaluation of management accounting system as to responding to various financial problems
Management accounting is the process of making management reports for the internal
members of the organization like mangers, stakeholders, employees who are directly related with
the organization (Otley, 2016). Management accounting is done to prepare the financial
statements which are used for strategic decision making to evaluate and analyse the information
and make strategic plans accordingly to achieve organizational goals and objectives.
Evolution of management accounting over decades:

 The international federation of accountants, 1998 describes management accounting
before 1950 as an activity which is necessary to pursue for the attainment of
organizational goals and objective. Cost accounting was the essential tool for determining
operational efficiency and financial stability for cost determination and controll of
finances in the business.
Illustration 1: historical evolution of management accounting
(Source: historical evolution of management accounting, 2015

 Cost accounting further evolved as managerial accounting in the year 1951 till 1980 to
provide information to management for planning and controlling and take necessary
decision accordingly(Historical evolution of management accounting, 2019).
 It further evolved as cost management in the year 1980's to reduce wastage by applying
various cost techniques and product life cycle management.
 The current scenario of management accounting which evolved in the year 1990 focus on
value based management where it aims at satisfying the need of customers by applying
various strategy.
Ratio analysis
Ratio analysis is a quantitative and fundamental analysis of data for gaining information
regarding company's profitability, liquidity and operational efficiency, productivity and financial
stability of the company.
Detection of financial problem through ratio analysis
◦ Liquidity ratio : This ratio helps in detecting weakness of the company and it also
measures the ability to pay off its liabilities. Lower the liquidity ratio higher the risk
to the company.
◦ Current ratio helps in detecting financial problems of the company in case liabilities
are more than asset.
Key performance indicator ( KPI's )
This is a type of performance measurement which helps in understanding and
evaluation the performance of the organization and it also analyses the performance of
department which are crucial for the development of the organization (Geiszler, Baker and
Lippitt, 2017). Key performance indicators are of numerous types like, cost of service delivery,
cost of managing various processes, return on investment, revenues from each employee,
efficiency in production, etc. all these types of KPIs helps the managers in detecting efficiency in
performing various activities of the business. With the help of which the managers can determine
their efficiency and in case of lack of efficiency, they can easily detect the problem that can be
arise due to these inefficiencies and determine their solutions as well.

Detection of financial problem through KPI's
For example, with the help of return on investment KPI system, the managers can easily
detect the areas from which the company is getting lower amount of return. Further, with the
help of it, they can easily determine the areas of lower returns, they can effectively determine
the solution for the future problems and help the company in becoming more effective in
resolving the financial problems as well. Further, Each department of the organization can
analyse sale and cost associated with tehm which help them detect and analyse the operations of
the particular department and measures regarding them. It detects revenue and profit and take
effective necessary measures to reduce cost. It also detects the expenses and cost of goods sold to
to detect the problems in case of any operational inefficiency.
Benchmarking
Benchmarking is a process of measuring performance of the company product, services,
cost, revenue sales and profit with the set benchmark. In case of any deviation in the production
process, sales process it helps in finding problem to the solution(What is Benchmarking, 2018).
Detection of financial problem through Benchmarking
In case there is deviation in production process from the set benchmark it helps in
detecting the actual cause of the deviation and it helps analyse the actual cause of the problem by
taking necessary measures regarding it.
An analysis of how management accounting as to help in responding to various financial
problems
There are numerous types of management accounting systems that helps the managerial
functioning. Further, there are various tools like cost control, inventory management, price
optimization, etc. that provides help to the managers in solving a range of financial problems of
the business in more effective way. Many companies like Volkswagen group, Toyota group,
Mercedes-Benz, etc. Uses these management accounting system tools for the purpose of
responding to numerous financial problems effectively as under:
 Cost control system: cost control system refers to a practice of managers through which
they can detect use of cash resources within an organisation . They can also detect the

areas of wastage of cash, through which they can effectively manage the financial system
of the company.
Volkswagen group being an automobile manufacturing company, adopts various cost
controlling techniques like budgetary control system, variance analysis, etc. adoption of these
techniques helps in detecting the areas of inefficiencies and determining the numerous problems
that can be arisen due to these inefficiencies as well. In this regard, they can develop the
strategies and plans as to enable the company in facing those problems effectively. In this regard,
using cost control system helps the managers of Volkswagen in effectively solving numerous
financial problems.
 Inventory management system: Inventory management system is a system that
provides help to the managers in tracking the movement of stock within or outside the
business organisation. The Mercedes-Benz company being a manufacturing business,
needs to maintain a range of stock in the business for the purpose of developing
smoothness in working.
With the help of adopting the best inventory management system, managers of the company can
detect the areas or departments at which the inventories are being wasted within the organisation.
In this regard, managers enables the company in facing various financial problems like shortfall
of inventories, insufficient production, etc. by developing appropriate solution for these problems
and for eliminating wastage of stocks as well.
 Price optimization system: Price optimization system refers to a system of management
accounting system that helps in determining the best price for selling the product at which
the company could earn the maximum profit and customer could get maximum
satisfaction as well.
Toyota group helps Uses the adopts price optimisation technique while determining the price of
the products of the company. It helps the company in deciding the best price of the product that
helps the business in attracting maximum amount of customers towards it.
Therefore, it can be analysed that all the management accounting system tools enables
managers in determining all tfinancial problems due to inefficiencies in numeorus business
activities. It helps the managers in making the company unable to face all the probloms in an
effective way.

Further, with help of these systems, managers can develop the best strategies for the
business through which the company can enhance its financial performance and attain a rapid
growth and success in the competitive market as well.
CONCLUSION
From the above study it can be concluded that management accounting system helps the
business in developing proper strategies for the business for enhancing its financial performance.
Both marginal and absorption costing helps the business in determining profit of the business.
Further, there are various management accounting system and planning tools that helps the
business in predetermining various financial problems and solving them in more effectively as
well.