Aspect of Management Accounting

MANAGEMENT
ACCOUNTING

Table of content

INTRODUCTION
The MA is a kind of accounting which is associated with process of recording monetary
and non monetary activities of a business in a systematic way (Zarzycka, Dobroszek, Circa and
Almasan, 2017). Main purpose of recording these transactions is to prepare internal reports
which are essential for management department of companies. In current scenario, the role of
this accounting is becoming wider because it includes different accounting systems and reports
that play a significant part in activities of business. In report, variety of MAS and MA techniques
are demonstrated. As well as types of planning tools and role of MA in order to sort financial
problems are also mentioned. For better understanding of these aspects of MA PC clothing
limited company is chosen which is located at London, United Kingdom. The organisation deals
in manufacturing of vital range of cloths.
TASK 1
P1. Management accounting and its types.
The MA is a way of collecting and analysing monetary and non monetary information for
producing internal report.
Functions of management accounting systems -
 Provide data – This is key function of management accounting that is related to gathering
all kind of data that occurs in businesses due to transaction.
 Modify data – Another function of this accounting is to modifying the gathered data. In
other words, ignoring those information which is not linked with business activities.
 Analyse and interprets data – In the management accounting, modified data is being used
to produce reports and statements which is being interpreted to take important decisions
(Evans and Tucker, 2015).
 Qualitative and quantitative information- Under this accounting systems, qualitative and
quantitative information is included that are beneficial for companies in making plans &
policies.
Various kind of accounting systems -

 Financial accounting system – This is a systematic process of analysing financial
transaction of a business in order to prepare different financial statements. The prepared
financial statements are being presented to internal and external stakeholders. In this
accounting system, it is necessary to conduct auditing of all produced financial
statements so that their efficiency can be evaluated. In the above selected company, their
accountant prepare financial statements which are audited by auditor as per this
accounting. For example PC clothing company prepare the income statements to evaluate
their profitability and loss in end of year as accordance of this accounting.
 Cost accounting system – This is a process of projection of futuristic cost and allocating
funds accordingly (Cohen, Karatzimas and Naoum, 2015). It helps to finance department
because they need it for proper use of available financial resources in a better way. Thus,
it is essentially needed in companies for controlling and reducing expenditure of different
kind of activities. For example in, PC clothing limited they are using this accounting
system for minimising the overall cost of activities and operations of clothing production.
 Management accounting system – This is an accounting system which assists companies’
financial information and create reports for managers to take decisions. It is needed for
supporting in decision-making. It is so because prepared reports consist monetary and
non monetary information that are needed by managers. Like in above company, the
MAS supports them in taking decision about different activities and operations regards to
cloth manufacturing. For example use of price optimisation system of management
accounting leads to effectively price setting.
 Tax accounting system – It is an accounting whose main objective is to managing overall
taxation activities. In this accounting, it is essential that companies must follow
prescribed rules and regulations when computing tax return. For example, there are
international taxations rules which are essential for companies to apply in process of
calculating tax rate. As well as the PC clothing limited computes tax at the end of year by
help of this accounting.
P2. Different methods used for management accounting reporting.
MA reporting – It can be defined as a process of preparing internal reports in order to
help board of directors in decision-making.

Types of MA reports :
 Account receivable ageing report – This can be defined as a kind of report which contains
information about credit transaction made by company with customers or other parties
(Krause and Tse, 2016). By using this report, companies get aware about how much
amount is needed to be collect from debtors in market. The above PC clothing limited is
preparing this report with an objective to find out those debtors who are making delay in
payment even after pre-set date of payment.
 Cost accounting report – In this, information about each and every activities cost is
included. By using this report, companies can estimate further time period cost. As well
as it becomes easy to assess which activities are resulting in higher cost in compare to last
accounting period. PC clothing company's accountant is preparing this report to aware
overall expenditure in an accounting time period.
 Inventory report – In it, information of quantity of stored commodities in stores. With
the use of this report, production department becomes able to take corrective decisions
regards to manufacturing and purchasing. The above company is preparing this report in
order to produce cloths as per the stored quantity in warehouse.
Purpose of financial statements :
 Profit and loss account – The main purpose of preparing profit and loss account by
companies to know about net profit at the end of financial year. By help of measured net
profit, rate of dividend is computed.
 Balance sheet – Companies prepare balance sheet for checking the amount of net assets
and liabilities at the end of year.
 Cash flow statement – This statement is prepared by companies with an objective of
assessing cash position. Under it, cash position is evaluated by help of three activities:
operating, financing and investing (Becker, Wald, Gessner and Gleich, 2015).
 Cost of goods sold – It helps in providing information about total cost incurred in process
of selling products.
Types of MAS -

 Price optimisation system - This is a system which is assigned with process of guiding
companies' managers in order to set the price of products and services. Under this
accounting system, prices are set by gathering customers feedback on alternative prices
and demand in market. Hence, the price optimisation system is needed in companies for
keeping prices of products at level which is acceptable by all customers as well as
beneficial for company. Under the chosen company, PC clothing limited they implement
this accounting system which is helping them for setting price of their manufactured
cloths as per analysis of customers' feedback.
 Inventory management system – This is a system which is applied by companies for
evaluating quantitative aspect of unprocessed material and prepared products (Khan and
Jain, 2018). This accounting system is being enabled in companies by coordination of
production department. It is so, as the production department acquires key information
from this accounting which becomes a basis for taking decision for operational activities.
In the aspect of PC clothing limited company, they are using this accounting system that
is helping them in effective management of processed and unprocessed material of cloth
manufacturing such as fibre, cotton, wool and many more. The above company is using
LIFO method for managing inventories in an effective manner.
 Job costing system – This is an accounting system which is linked with process of
allocating and compile production cost of a particular unit. Basically, this accounting is
suitable for those business entities wherein wide range of products are produced. In
computes each produced unit's cost individually and becomes possible only by checking
number of job assigned in different operations.
TASK 2
P3 Income statement under absorption and marginal costing.
Absorption costing – This can be defined as a costing technique in that fixed and variable
costs are assigned as unit cost during preparation of income statement.
Marginal costing- Under this, fixed cost is taken as period cost and variable cost as per
unit cost in process of preparing income statement (da Silva, Llewellyn and Anderson-Gough,
2017).

Case 1.
(a) Cost card using marginal costing :
Cost card (Marginal costing method)
£/unit
Direct material 50
Direct labour 15
Variable overhead 9
Marginal cost 74
Selling price 150
Marginal cost 74
Contribution 76
(b) Profit and loss account:
Income statement for month of January:
Particulars DR CR
Sales (12000 * 150) 1800000
Direct material (15000*50) 750000
Direct labour (15000*15) 225000
Variable cost (15000*9) 135000
Fixed production overhead 30000
Less : Closing stock (3000*74) 222000
Less: Cost of sales 918000

Profit 882000
Income statement for month of February
Particulars DR CR
Sales revenue (14000 * 150) 2100000
Direct material (12000*50) 600000
Direct labour (12000*15) 180000
Variable cost (12000*9) 108000
Add : Opening stock (3000*74) 222000
Fixed production overhead 24000
Less- Closing stock (1000*74) 74000
Less: Cost of sales 1282000
Profit 818000
Income statement for month of March
Particulars DR CR
Sales revenue (11000 * 150) 1650000
Direct material (10000*50) 500000
Direct labour (10000*15) 150000
Variable cost (10000*9) 90000
Add : Opening stock (1000*74) 74000
Fixed production overhead 20000

Less: Cost of sales 834000
Profit 816000
Case 2.
(a) Cost card using absorption costing :
Cost card (Absorption costing)
£/unit
Direct material (50*15000) 750000
Direct labour (15*15000) 225000
Production overhead (fixed + variable) [7*15000] 105000
Total cost 1080000
Absorption cost of product 1080000 / 15000= 72
Selling price 150
Less- Total cost 72
Profit 78
(b) Income statement of January:
Particulars DR CR
Sales (12000*150) 1800000
Variable cost:
Direct material (15000*50) 750000
Direct labour (15000*15) 225000

Less- Closing stock (3000*74) 222000
Fixed production cost (30000+3000) 33000
Less: cost of sales 786000
Profit 1014000
Income statement of February month:
Particulars DR CR
Sales revenue (14000*150) 2100000
Variable cost:
Direct material (12000*50) 600000
Direct labour (12000*15) 180000
Add- Opening stock (3000*74) 222000
Less- Closing stock (1000*74) 74000
Fixed production cost (24000+3000) 27000
Less: cost of sales 955000
Profit 1145000
Income statement of March month:
Particular DR CR

Sales (11000*150) 1650000
Variable cost:
Direct material (10000*50) 500000
Direct labour (10000*15) 150000
Add- Opening stock (1000*74) 74000
Fixed production cost (20000+3000) 23000
Less: cost of sales 747000
Profit 903000
TASK 3
P4. Limitations and profits of planning tools.
The term budgetary control is a way of estimating financial and non financial outcomes
with help of budgets. With the use of it, companies become able to compare actual performance.
Budget – This is a way of making projection of futuristic income and expenses in order to
compare actual outcomes (Hosomi, Scarbrough and Ueno, 2017). Basically the budgets are
prepared for time period of one year. Herein, below different types of budgets are demonstrated
which are as follows :
 Zero based budget – Under this budget all activities are included after justifying. One
thing which makes different this budget from rest of others is that under it, previous
years' budgeting activities are not considered. The PC clothing limited is preparing this
budget in order to bring some accuracy in estimated income and expenses.
Advantage- This budget is helpful to companies because it minimises the redundant
activities.
Disadvantage – Preparation of zero based budget is more time consuming and expensive
because justifying each activity lead to need of more manpower.

 Cash budget – This is a budget which includes activities regarding to estimated cash
receipts and payable during a particular time period (Berry, Broadbent and Otley, 2016).
By help of this budget, companies get able to know about cash position in futuristic time.
PC clothing manufacturing company's accountants produce this budget to manage and
enhance the cash position.
Advantage – On the basis of this budget, companies allocates cash in various operational
activities that help in savage from unwanted expenses.
Disadvantage – This budget limits spending power and due to it companies' fail to grab right
opportunity on right time.
 Capital budget – This can be defined as budget that produced by companies in order to
assessing effectiveness of companies' long term investments. As well as companies make
futuristic long term investment decisions by help of this budget. Such as the above PC
clothing limited company, produce this budget to take decision about purchasing of new
machinery for cloth manufacturing.
Advantage- By help of this budget companies get able to select an alternative for investment
from vital range of options.
Disadvantage – Preparation of this budget requires skilled workforce which is not possible to
find by all companies. As well as it is quite expensive.
Alternative method of budgeting -
 Traditional historic budgeting – It is a type of method of budgeting in which budgets are
prepared by considering last year's figures and making modification as per the expected
outcome.
 Activity based budgeting – In this method of budgeting each activity's cost is assigned
separately and on the basis of it budgets are prepared.
Behavioural implications of budgets -
 Participative budgeting – This process of budgeting is based on bottom up approach in
which low level employees are involved in budget preparation.

 Dysfunctional behaviour – As per this behavioural implication, when actual output meets
with the estimated income and expenses then this may lead to positive behaviour among
staff member of an entity (Harritz, 2016).
Case 3.

Case 5
TASK 4.
P5. Comparison of organisation in order to sort out financial issues by help of management
accounting system.
Financial issues- These issues arise in companies when a business entity does not have
enough fund in order to operate their activities.
Types of financial issues :
 Lower sales – In this type of financial issues, companies fail to meet the criteria of
budgeted sales. Due to it, revenues start to decrease and financial issue arises. Such as in
above PC clothing limited company, they are facing this issue because their sale of cloth
is continuously reducing.

 Increased expenditures – Another financial issue that is commonly faced by companies is
increased amount of expenses. Main cause of occurring this financial issue in businesses
is ineffective allocation of funds in activities and lack of control over expenses.
Methods to identifying the financial issues :
 Benchmarking – This is a technique of comparing a company's financial and non
financial aspect with an ideal company of similar industry with an objective to find out
financial weakness ( Mancini, Dameri and Bonollo, 2016). In above PC clothing limited
company, they address their financial issue of lower sales by making comparison of their
financial aspects with other successful company.
 KPI – Under this technique activities that are becoming as a cause of higher expenditure
are highlighted. By doing so, business entities can trace those issues which are resulting
in increased expenses. This technique is being used to solve the issue of increased
expenditures.
Comparison between organisations:
Basis PC clothing limited Spirit clothing 2000 limited
Financial
problem
Their monetary problem is about
lower amount of sales that is resulting
in lack of revenues at the end of year.
While this company's monetary
problem is about increased expenses in
current year. Due to this financial issue,
they are not able to operate their other
organisational activities.
Method to
deduct
financial issue
They are using “benchmarking”
method in order to find out actual
financial issue. It becomes possible as
they compare their sales of a
particular time period with an another
company's sales (Corvellec, 2018).
This company is applying “KPI”
method to address actual financial issue.
By help of it , above company becomes
able to focus on those activities which
are main reason of increasing in
expenditure of all operational activities.
MAS To solve the financial issue, they are
using “price optimisation system”.
Their financial issue is resolved by help
of “cost accounting system”. It is so

The reason of applying this
accounting system is that by help of it,
they are able to set the price of cloths
at a level that is suitable for all
customers. By doing so , their average
sales is increasing along with total
revenue.
because this accounting system is
guiding their finance department to
allocate funds effectively. As well as by
use of this accounting system their
unwanted expenditures are reduced and
their financial issue is resolved
effectively.
CONCLUSION
As per the project report this can be articulated that MA is evolving as an essential
accounting system for companies. Under report, various accounting system like tax accounting
system, financial accounting system etc. are concluded as well as some MA reports such as stock
report, A/c receivable ageing report etc. are also mentioned. In addition, income statements are
produced according to absorption and marginal costing methods. Further, some planning tools
like cash budget, ZBB etc. are involved in report. In the end of report, importance of MAS in
order to sort financial issues is demonstrated.