Importance of Management Accounting in Decision-Making Process

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO 1 and LO 2.................................................................................................................................1
1. Importance of management accounting in decision-making process of organisation............1
2. Explanation of different types of management accounting system which used in reporting
and its integration in business operation.....................................................................................2
3. Critically evaluating benefits of management accounting system and MA reporting in
context of organisational process................................................................................................3
4. Calculation of absorption and marginal costing and reconciliation statements......................6
LO 3 and LO 4.................................................................................................................................9
Planning tools of management accounting which indicate levels of effectiveness for Nero Ltd.
Organisation................................................................................................................................9
Use of planning tool in solving financial problem of organisation...........................................11
Effective tools of management accounting in solving financial problems of Nero Ltd...........12
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is the tool which used to prepare management reports and
accounts in organisation (Kaplan and Atkinson, 2015). These are statements which provides an
accurate and statistical financial information to managers in developing short term decisions and
to analysing day-to-day business operations. This report provides an assessment which relates to
importance of management accounting in developing decision making process in Sewport
company. Types of management accounting system is also to be elaborated in this report with its
critical evaluation. Further, an explanation is to be provided on three planning tools used in MA
and its level of effectiveness for solving financial problems of Nero Ltd organisation. Thus,
illustration is given on importance of management accounting in achieving organisation success.
LO 1 and LO 2
1. Importance of management accounting in decision-making process of organisation
Business owners and managers of Sewport company have to face numerous decisions in
regular operations of organisation (Importance of Management Accounting, 2018). Therefore, for
developing effective decision in organisation, management accounting statements provides
useful and accurate information which is related to day-to-day business operations. Such
information will relate to profit margin and labour utilisation which overall helps management in
developing effective decision in achieving success of organisation. Its importance are as follows-
 Relevant Cost Analysis:
Management accounting information used by mangers of company in deciding products which
needs to produce for increasing sales volume of organisation. For developing effective products,
MA helps in analysing revenue which earned by company and expenses which incurred for
developing business operations (Otley, 2016). Therefore, this accounting tool used to determine
whether to add any product line in organisation or to discontinue business operations.
 Activity-based Costing Techniques:
This is the technique which helps management in determining activities which required to
perform in selling products of organisation among customers. This is the activity which overall
helps in deciding which product has demand in business market which overall helps in
generating profit for Sewport company.
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 Make or Buy analysis:
Importance of managerial accounting is to provide information related to manufacturing process
of company. This process used to analysis overall revenue and expenses which incurred by
company during its business operations. This analysis overall helps in developing decision in
manufacturing product which provide more profit to company.
 Utilizing the Data:
Management accounting provides information which helps in analysing utilization of resources
in organisation. Statements which provide effective guidance in developing decisions which
helps in improving performance of Sewport company are budgeting, financial statements and
balance scorecards.
 Creates budget which helps in developing growth:
This is the accounting process which helps in developing effective budget for operating business
operations in business market (Cooper, Ezzamel and Qu, 2017). Set budget with information of
MA overall develops long-term profitability and growth of the company.
These are the importance of management accounting which is used by owners of
Sewport, in developing effective decision-making process. Decisions which developed with
considering information of management accounting will overall result in long term profitability
and growth of organisation.
2. Explanation of different types of management accounting system which used in reporting and
its integration in business operation
Management accounting system is the software which is used in Sewport organisation to
track accounting activities of company. Its objective is to provide information related to internal
operations of company. This information develop more emphasis on planning and controlling
process of company. Different types of management accounting system which used in preparing
reports are as follows-
Cost Accounting Systems:
It is a framework which used by Sewport organisation in estimating the overall cost of
products and services which offered by company in business market. This accounting system
evaluate profitability, inventory valuation and cost control of goods and services of company.
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Therefore, it is the accounting system which used by organisation in tracking its raw materials
which is used in production stage and will convert into finished goods. This method helps
management in analysing individual cost of products which helps in comparing financial
performance of organisation. There are two cost accounting system that is-
Job order costing which overall accumulates manufacturing cost of organisation.
Sewport company apply this costing technique in providing unique and special products among
consumers.
Process costing system is accounting method which is used in Sewport company to
accumulate manufacturing cost for each process in company (Tappura and et.al., 2015). This
system used by organisation to analyse process requires inflows of cash in different department
of business areas.
Job Costing Systems:
This is method which is used by Sewport company for assigning manufacturing cost of
products which offered by company. This system only used by company when they are offering
diversified products in business market. Therefore, this method helps in recording direct material
and direct labour used to assign each job in company.
Inventory Management Systems:
It is the system which helps in tracking entire supply chain or portion which used in
business operation of company. This is the system which helps management of Sewport to see all
small moving parts of business operation which overall helps in developing effective decisions
for company. There are different methods of this system which includes-
Set par levels by which management set par levels for each products of company. It
shows minimum amount of products which must be present in organisation all the times.
First-in First-Out is the important principle which means that oldest inventory of
company will sell first and then newest inventory will get sold.
Last-in First-out is the method which used by company in selling the newest stock first
and oldest stock at the end.
3. Critically evaluating benefits of management accounting system and MA reporting in context
of organisational process
 Importance of management accounting systems
Methods Advantages Disadvantages
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Cost accounting systems  With implementation
of this system,
company will able to
disclosed profitable
and non-profitable
activities by which
steps will develop to
eliminate activities
which is less
beneficial.
 It overall guide to
develop future policies
to incurred cost which
provides more
profitable for business.
 Cost get manifested
because cost accounting
procedure develop from
one organisation to
another (Mårtensson
and et.al., 2016).
Job Costing systems  With the help of this
technique, company
will able determine
profitability for each
job in company.
 It also helps in
estimating future cost
which required in each
job of company.
 For developing this
system in organisation,
huge cost investment is
required in which more
chances of errors are
there.
Inventory management
systems
 With implementation
of this system,
company will able to
save cost as well as
time by estimating
required inventory for
 Major disadvantage if
this system is that it
require high cost
implementation with its
development in
organisation.
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operations of business.
 With the help of this
technique, overall
efficiency of
organisation will get
increased (Kerzner and
Kerzner, 2017).
 Importance of management accounting reporting
Budget Report:
This is the report which is used by management and owners to analyse business performance and
cost control in organisation. Budget which developed in Sewport organisation is by comparing
actual expenses from previous year. This budget report was also used by managers in deciding
incentive of employees of company which overall lead to develop motivation among them in
achieving financial objectives of company.
Accounts Receivable Aging:
This is the report which is used by Sewport company for managing overall cash flow of company
which credited to customers of organisation. This report generally used by owners in finding
problems related to collection process of company (Harrison and Lock, 2017). If there are clients
which will not able to pay amount of company then will tight its credit policies for developing
effective business operations.
Job Cost Reports
This is the report which shows finance of specific projects of company. To evaluate job
profitability this reports are matched with estimation of revenues which helps in identifying
higher- earning area of company. This report also helps management in eliminating areas which
are incurring higher expense and have no use in the production process of company.
Inventory and Manufacturing:
To make manufacturing process more efficient in company, this managerial accounting report
produced by management in developing effective decision in improving manufacturing process
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of company. Items which included in this report are inventory waste, hourly labour cost or per-
units of overheads.
For developing effective business operations, integration of these reports will prove
beneficial in organisational process of Sewport company (Dale and Plunkett, 2017).
4. Calculation of absorption and marginal costing and reconciliation statements
a.) Calculation of absorption and marginal costing:
Profit & Loss Statement using Absorption Costing
(Quarter 1)
particulars £ £
sales 66000 1 66000
Cost of goods sold:
Variable cost 78000 0.65 50700
Add: fixed cost 78000 0.2 15600
Total production
cost
66300
Add: opening stock 0
Total stock
available for sale
66300
Less: closing stock 12000 0.85 10200
Cost of goods sold: 56100
GROSS PROFIT 9900
Less: under
absorption of fixed
overhead
16000 15600 400
Less: selling and
admin cost
5200
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NET PROFIT 4300
Profit & Loss Statement using Absorption Costing
(Quarter 2)
particulars £ £
sales 74000 1 74000
Cost of goods sold:
Variable cost 66000 0.65 42900
Add: fixed cost 66000 0.2 13200
Total production
cost
56100
Add: opening stock 12000 0.85 10200
Total stock
available for sale
66300
Less: closing stock 4000 0.85 3400
Cost of goods sold: 62900
GROSS PROFIT 11100
Less: under
absorption of fixed
overhead
16000 13200 2800
Less: selling and
admin cost
5200
NET PROFIT 3100
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Profit & Loss Statement using Marginal Costing
(Quarter 1)
particulars £ £
sales 66000 1 66000
Production cost:
Variable cost 78000 0.65 50700
Add: opening stock 0
Total stock
available for sale
50700
Less: closing stock 12000 0.65 7800
Cost of goods sold: 42900
Contribution
margin
23100
Less: fixed
manufacturing
overhead
16000 13200 16000
Less: selling and
admin cost
5200
NET PROFIT 19000
Profit & Loss Statement using Marginal Costing
(Quarter 2)
particulars £ £
sales 74000 1 74000
Production cost:
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Variable cost 66000 0.65 42900
Add: opening stock 1200 0.65 7800
Total stock
available for sale
50700
Less: closing stock 4000 0.65 2600
Cost of goods sold: 48100
Contribution
margin
25900
Less: fixed
manufacturing
overhead
16000 13200 16000
Less: selling and
admin cost
5200
NET PROFIT 4700
b.) calculation of reconciliation statements:
Reconciliation of Profit
Quarter 1 Quarter 2
Particulars £ £
Profit under
absorption
costing
4300 3100
Stock
Adjustment:
Opening stock 0 12000
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Less: closing
stock
12000 4000
12000 8000
Fixed overhead
rate
0.2 -2400 0.2 1600
Profit under
marginal costing
19000 4700
LO 3 and LO 4
Part A
Planning tools of management accounting which indicate levels of effectiveness for Nero Ltd.
Organisation
For managing business operations of Nero Ltd. Planning tools are effective budgetary
control analysis which helps in managing overall cost of organisation. This planing tools also
helps in maximizing profits of the company. Therefore, its development is necessary in
managerial accounting because it keeps focus on different important things, plans and policies of
organisation. It also helps in developing effective pricing strategies for products and services of
company. For developing pricing strategies, Nero Ltd. Will analyse financial statements of its
competitors to offer products and services to customers.
Job costing helps company in accumulating manufacturing cost of goods and services. To
offer special products to consumers this costing method is used by company. Process costing
method used by company in accumulating process of manufacturing products of company
(Weygandt, Kimmel and Kieso, 2015). Batch costing technique is used by organisation to find
cost of identical unit of each batch of goods and services. Tools of management accounting are
as follows-
 Actual Costing-
Actual costing is the tool which is used in Nero Ltd to find the actual cost of material, labour and
overhead. With the use of this technique, company will able to trace direct cost of the object
which has measurable cost. Therefore, this is the method which is used to calculate actual cost
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which is incurred and allocated in an organisation. This system will not require any pre-planning
of costing.
ADVANTAGES DISADVANTAGES
This system overall helps in controlling cost of
organisation by setting standards and by
highlighting variances of the company.
With the use of these techniques, company
determine materiality limit of variances but it
will result in developing controversy in
organisation.
It also helps in developing useful information
for developing managerial planning and
decision-making process in company.
With its implementation, workers of company
will not report negative aspects of budget
which leads to develop ineffectiveness of
budgeting (Messner, 2016).
With the helps of this system, company will
able to develop more reasonable and easier
measurement of inventory in organisation.
Its implementation result in developing low
morale for some workers because management
only focus on usual variance.
 Activity-based Costing-
Activity-based costing is an accounting method which is used to identify overhead costing and to
assign cost of products of the company. This is the technique which is used to recognise
relationship between cost, overhead and products which manufacture in organisation.
ADVANTAGES DISADVANTAGES
Main advantage of this method is that it
provides an accurate cost of the products. This
costing technique determine reliability in
product cost.
Major disadvantage of this system is that it is
very expensive to apply in organisation.
This method will analyse actual nature and real
cost of behaviour which over helps in reducing
cost and activities which has no value in
production process of company.
With the implementation of this technique,
company face difficulty in selecting cost
drivers, assignment of common cost etc in
organisation.
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 Zero-based Costing-
It is the method which is used to develop budget from the starting point in which comparison is
not analysed with past performance of company. With this costing technique, there is no chance
of occurring error if correct utilisation of factors is considered in organisation.
ADVANTAGES DISADVANTAGES
With the implementation of this system,
company will able to distribute budget in more
efficient manner which is based on current
needs.
Major disadvantage of applying this technique
is that it is very time consuming in analysing
costing factors of organisation.
This method also provides a true control over
cost which can be increased or decreased with
the needs of organisation (Miller, 2018).
This method require too much time and cost
for implementing this method in business
operation.
Comparison: all these methods are effect full in its place. Actual costing helps
organisation in finding the actual cost of material, labour and overhead. Activity-based costing
helps in identifying overhead costing and cost to assign cost of products of the company. Zero-
based costing helps in to developing budget from the starting point in which comparison is not
analysed with past performance of company. Therefore, its importance for Nero ltd. Is that these
costing system helps for proper utilisation of resources in company which overall helps in
achieving growth of company.
Strategic Planning: for proper analysis of financial position of Nero ltd, company will
develop strategic planning which is through use of macro-environmental models. PEST analysis
is the effective tool which helps managers in determining factors like political, economical,
social and legal which needs to improve in developing effective business operation in market.
Use of planning tool in solving financial problem of organisation
Planning tools are the one by which company will able to develop effective budget for
utilising resources of company in effective manner. Actual costing helps in analysing variances
which provides a picture of overall performance of organisation (Glass, Stefanova and
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Prinzivalli, 2014). In solving financial problems, Nero ltd. Develop budget with by analysing
cost of labour, material and overhead so that unnecessary cost will be eliminated from
organisation which overall leads to achieve success of company.
Activity-based costing is the method which establish casual link between cost driver and
indirect cost. In solving financial problems of company, this technique provides an accurate cost
of the products which helps in eliminating additional value of cost which unnecessary incurred
by organisation. Therefore, by eliminating wastage, Nero ltd able to achieve sustainable growth
of company.
Zero-based budgeting is the effective tool which used by company in developing budget
which is only useful for present operation of business. By not analysing, past performance
activities company will able to develop effective budget strategies which helps in achieving
growth of company.
Part B
Effective tools of management accounting in solving financial problems of Nero Ltd
 Identification of financial problems:
Common financial problems which faced by Nero Ltd is regarding lack of cash flows, huge
advertising activities, poor accounting practises, and unnecessary expenditure. There are various
management accounting tools by which company will able to solve its financial issues.
Using Benchmarking:
Benchmarking considered as most important source of which is for measuring financial
performance of Nero ltd. Benchmarking helps in identifying problems which relates to variances
of organisation (Financial Benchmarking- What is financial benchmarking, 2018.). In solving
that variances, benchmarking helps in developing set of standards which measure various
management accounting techniques in solving financial problems of organisation. Benchmarking
is the method in which company will develop set of practise by comparing business operations of
other organisation. The most common value which used in its measuring are Quality, time and
cost elements of company.
For example: Nero ltd. Facing problems in proving quality of products in proper
allocation of time. Therefore, its managers has decided to use benchmarking where they have
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analysed financial statements of its competitors in developing effective strategies in providing
quality of services with proper time in business market.
Using Key Performance Indicators:
Key performance indicators are the one which helps in solving financial problems of company
by effective analysis of resources. There are two types of key performance indicators that is
financial and non-finanacial. Financial indicators are the one by which company will analyse
ability of company in paying its short term debt and assets. Financial indicators also helps in
identifying capabilities of short term assets of company with respect to short term debt. Financial
indicators also helps to remain solvent by developing effective day-to-day business operations.
Non-financial indicators are the one which used by human resource management of
company. In which human resource management, will develop skilled staff in achieving
organisational objectives.
For example:- Nero ltd. Does not have effective skilled staff which helps in developing
timely availability of products and services in business market. Therefore, human resource
department develop strategies where to achieve success of company, management has hired
skilled staff which are motivated in developing business operations in marketplace.
 Importance of management accounting to respond financial problems in achieving
sustainable success of Nero ltd.
Management accounting plays an important role in developing sustainable success of business in
Nero Ltd. Organisation. In solving financial problems, effective management accounting tools
and techniques will be used by managers. Such tools may be zero-based costing, activity costing,
standard costing etc. These are the techniques which helps in developing effective strategies
which help in integrating various problems in proper decision-making process.
Management accounting also helps in preparing report which provides necessary
information of day-to-day activities of business. This analysis helps in understanding strategies
which needs to develop regarding pricing and budget of organisation. Therefore, management
accounting helps in developing planning and controlling activities in which specific planning get
developed to execute effective business operations.
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Management accounting also helps in implementing plans with helps of managerial
reports such as budgetary reports, performance report etc. Decision which developed with use of
this report overall helps company in achieving competitive advantage of company.
CONCLUSION
From the above report it can be summarised that, management accounting is the effective
tool which needs to develop in every organisation. This managerial accounting helps in
developing policies and strategies for developing effective day-to-day operations. Different
budgetary tools are explained in this report which analysed importance of budget in solving
financial problems of organisation. It is also summarised from this report that, tools of
management accounting also helps to develop effective policies by which company will able to
achieve its sustainable success from business market.
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REFERENCES
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Glass, V., Stefanova, S. and Prinzivalli, J., 2014. Zero-based budgeting: Does it make sense for
universal service reform?. Government Information Quarterly.31(1). pp.84-89.
Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach.
Routledge.
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Kerzner, H. and Kerzner, H.R., 2017. Project management: a systems approach to planning,
scheduling, and controlling. John Wiley & Sons.
Mårtensson, M and et.al., 2016. Management accounting of control practices: a matter of and for
strategy. In the 9TH INTERNATIONAL EIASM PUBLIC SECTOR CONFERENCE, held in
LISBON, PORTUGAL, SEPTEMBER 6-8, 2016..
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.
Miller, G., 2018. Performance based budgeting. Routledge.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Tappura, S and et.al., 2015. A management accounting perspective on safety. Safety science. 71.
pp.151-159.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John
Wiley & Sons.
Online
Financial Benchmarking- What is financial benchmarking. 2018. [ONLINE]. Available through
<https://debitoor.com/dictionary/financial-benchmarking>
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