Management Accounting Systems and Techniques

This report discusses management accounting systems, techniques of cost analysis, and planning tools. It explores different types of management accounting systems such as financial accounting, cost accounting, management accounting, and tax accounting. The report also discusses methods of management accounting reporting and the integration of management accounting systems and reports in organisational processes. Furthermore, it covers techniques of cost analysis using marginal and absorption costs and the application and interpretation of financial reports. Finally, it examines the advantages and disadvantages of different planning tools and their application in Airdri Ltd., a company that manufactures hand dryers.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
LO 1.................................................................................................................................................3
P1 Management accounting and different types of management accounting systems...............3
P2 Methods of management accounting reporting......................................................................4
M1 Benefits of management accounting systems and their application.....................................5
D1 Integration of management accounting systems and reports in organisational processes....6
LO 2.................................................................................................................................................6
P3 Techniques of cost analysis using marginal and absorption costs.........................................6
M2 Application of management accounting techniques...........................................................15
D2 Application and interpretation of financial reports.............................................................15
TASK 3..........................................................................................................................................15
P4 : Advantages and disadvantages of different types of planning tools .................................15
M3 : Analysis of different planning tool...................................................................................16
TASK 4..........................................................................................................................................17
P5 : Comparison of how organisations are adopting management accounting systems to
respond to financial problems...................................................................................................17
M4 : Analysis of management accounting and financial problems..........................................18
D3 : Evaluation of how planning tools can solve accounting issues........................................18
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Management accounting is related to gathering, analysing and reporting financial
information about the operations and finances of a business to help the managers in their
decision-making process. These reports are prepared to be used internally by the managers and
not external stakeholders. Management accounting can help in managing and controlling the
expenses so that profitability of organisation increases. In this report various management
accounting systems, principles and techniques will be discussed. Further how financial problems
can be solved using management accounting will be discussed in relation to Airdri Ltd. which is
located in Technology House, UK and deals in manufacture of hand dryer which are recognised
for their reliability and low energy consumption. Planning tools for budgetary control will also
be discussed in this report.
LO 1
P1 Management accounting and different types of management accounting systems
According to the Institute of Management Accounts (IMA) : “Management accounting
involves planning, decision-making and providing financial reports to assist management in the
formulation and effective implementation of an organisation's strategy”.
The key functions of management accounting are discussed below : Provide data : It helps in gathering information related to all the functions of a business
which can help managers in planning, organising, controlling and decision-making
(Yeshmin and Hossan2011). Analyses and interprets data : The data is analysed and interpreted so that reports and
statements can be made to help managers in important decision making. Serves as a means of communication : Management accounting is responsible for
communicating the information gathered and analysed to the various departments so that
their activities can be coordinated and integrated to reach common goals.
 Facilitates accounts control : The accounts of the business can be managed to control
unnecessary expenses of the business (Agrawal, 2018).
Some management accounting systems are discussed below :
 Financial accounting system : The purpose of this system is to maintain financial
accounts of a business by collecting financial records i.e. any transaction which debits or

credits the account balance so that financial statements can be made. These financial
statements needs to be audited annually which helps in determining the position of a
business. The income statements are made so that profits and losses can be evaluated and
methods of controlling and managing losses can be formulated. The financial accounting
system helps in determining the financial position of business in market and the assets it
has along with its liabilities which helps investors in gaining a complete view about
company.
 Cost accounting system : It is a framework used in businesses to estimate the accurate
cost of their products so that profits can be analysed, inventory can be managed and costs
can be controlled. This help the companies in controlling costs at various stages of
production so that the wastages can be managed and costs can be reduced (Baiman,
2014). This system helps in analysing the cost of company for the analysis of
profitability, inventory valuation and cost control. It is important to estimate the correct
cost associated with production of products and services so that total profits can be
analysed.
 Management accounting system : This system helps the organisation in measuring and
evaluating the processes so that accurate and timely financial and statistical information
can be given to mangers to help them in decision making. The reports and statements
prepared based on the financial activities of an organisation can help in taking monetary
decisions and managing the expenses of business. This system determines the internal
systems that are used by company in order to measure and evaluate its processes for
managing the organisation. Also this system help in generating appropriate financial
statements so that stakeholders can analyse their interests associated with company.
 Tax accounting system : This system focuses on managing taxes of the company by
following rules and regulations governed by the Internal Revenue Code to prepare their
tax returns. This system helps in calculating accurate amount of tax that is due to the
government so that its intervention can be prevented in the company activities. Also it is
important to follow the tax regulations while preparing tax returns so that deductions and
other rebates can be gained which help in increasing the profits of business and also the
correct amount of due tax can be calculated.

P2 Methods of management accounting reporting
Management accounting reporting is a process of preparing internal reports that can be
used by managers in decision-making. Some of its types are discussed as follows : Account retrievable ageing report : This report contains the details about all the credit
transactions of a company which helps the managers in analysing the amount that is still
needed to be collected from the debtors. This report help in monitoring collection policies
to reduce old bad debts and manage the liquidity of the company (Bebbington, Unerman
and O'Dwyer, 2014). This report thus show unpaid invoice balances along with the
duration from which they have been outstanding. The estimation of bad debts can be
done by this method by listing the payments that have been due over a longer period of
time so that company losses can be identified. Job cost report : This report helps in identifying the cost, expenses and financial
efficiency of each job so that more profitable projects can given more attention. This can
help in evaluating the waste areas so that costs can be controlled and reduced. This report
help in identifying the total cost which is required to be incurred while performing each
job which helps in identifying the jobs which use a large number of company resources
and also the profitable jobs can be identified.
 Inventory report : These reports give information about the inventory of a business so
that a balance between inventory investment and customer service can be established.
This report contains labour cost, per unit overhead cost and wastages related to inventory
so that improvement can be made in managing inventory. Also this report help in
maintaining sufficient inventory stock in company so that the company does not run out
of stock. Also over assimilation of inventory can be managed which help in reducing
inventory cost of business.
Purpose of financial statement : Profit and loss account : This helps in knowing the net profits and losses generated by
the business at the end of the financial year. Balance sheet : This helps in evaluating the assets and liabilities of the company at the
end of financial year. Cash flow statement : This helps in assessing the cash position of the business i.e. the
cash inflows and cash outflows.

 Cost of goods sold : It helps in providing information regarding the costs that is involved
in selling products (Christ and Burritt, 2013).
Types of management accounting system : Price optimising system : This system helps in determining the prices of the products of
the company by evaluating the fluctuations in demands by change in price levels of the
products. Airdri Ltd. can use this system to tailor prices for different products based on
the demand of customers. Also promotional pricing, initial pricing, discount pricing can
be determined by this system, Job costing system : This system helps in determining the manufacturing prices of each
individual product while keeping a track on the expenses incurred. The products provided
by Airdri Ltd. are significantly different which helps in determining their costs so as to be
able to satisfy the customer requirements (Cohen, 2012).
 Inventory management system : Through this process technology can be used to monitor
and maintain the stock of products so that cost can be maintained at all the stages of
production by Airdri Ltd. in manufacture of hand dryers.
M1 Benefits of management accounting systems and their application
Management
Accounting
Systems
Benefits Application in Airdri Ltd.
Job costing
system
Help the managers in determining the
profits related to individual project
and check if they should be carried
out in future.
The company can determine the
costs of different types of hand
dryers it produces according to
customer requirements.
Price optimising
system
Helps in determining prices based on
customer demands that maximizes
organisational profits.
The company can use this system to
reduce operational costs and set
prices.
Cost accounting
system
Helps in making policies to control
and manage costs of materials, labour
and overhead costs.
The company can use this system to
ascertain cost of hair dryers.
Inventory Improves management of inventory The company can maintain sufficient

management
system
so that storage costs can be reduced
(Damodaran, 2012).
stock of hair dryers based on
customer needs.
D1 Integration of management accounting systems and reports in organisational processes
Type of reporting Integration with Airdri Ltd. processes
Budget report Aids in focusing efforts on profitable business activities so
that goals and objectives can be efficiently achieved.
Accounts receivable ageing
report
Helps in timely collection of accounts receivable and creating
appropriate collection policies.
Job cost report Helpful in determining prices of various products offered by
the company.
Inventory and manufacturing
report
Can be used in managing inventory levels and manufacturing
costs of the products.
LO 2
P3 Techniques of cost analysis using marginal and absorption costs
Cost means the total amount of money that was used in the manufacture of products or
services using various resources such as raw materials, labour, time risks, opportunity costs etc.
income statements can be prepared using marginal or absorption costings : Marginal costing : It is a costing technique wherein marginal or variable cost is charged
to units of cost i.e. it is the change in total cost when the quantity produced is increased
by one. Therefore is the cost of producing one more unit (Fowzia, 2011).
 Absorption costing : In this method all the costs that are involved in production of one
unit i.e. the variable and fixed costs. In this method all the costs associated with the
production of products are accumulated and apportioned to individual products.

CASE 1:

CASE 2:

(a) Cost card for January
(b) Profit and loss account for month of January:
Profit and loss account for month of February

Profit and loss account for month of March
Case 3
(a) Sales budget (in quantity)
Sales budget (in value)
(b) Production budget in units:

(c) Material purchase budget
(D) Material usage budget
Case 4
preparation of estimation of cash position from 1st April 2017
Case 5

(b) Calculate the variances between actual and flexible budget:
The difference between actual and flexible budget is as follows
Difference= 1550000- 1275400
= 274600
M2 Application of management accounting techniques
These techniques help in preparation of financial reports so that the actual position of the
company can be analysed and appropriate decisions can be made so that the position can be
improved. Different costing methods like marginal costing or absorption costing can be used by
an organisation so that production cost of products or services can be calculated. Marginal
costing is better than absorption costing as only variable costs are charged and fixed costs are
charged to profit and loss account of the period (Gray, 2015). It is a decision-making technique
and also helps in ascertaining the total cost of production.

D2 Application and interpretation of financial reports
These financial reports of the company is prepared with the help of absorption costing
and marginal costing which helps to identify the per unit cost of the products. On the basis of
these reports it is identified that only variable cost are considered in marginal costing which is
why the marginal cost per unit is Rs. 76. This does not provides the true picture as it fixed cost is
neglected which is to be recovered by the organisation from their operations. While the cost per
unit is Rs.78 through absorption costing as it includes both fixed and variable cost. This help the
organisation to determiner the actual profits.
TASK 3
P4 : Advantages and disadvantages of different types of planning tools
Budget is a statement which includes estimated sales, revenue, liabilities, cost and
expenses etc. for a specific period of time. This helps the organisations in internal management
as on the basis of this performances are measured and decisions are taken. While Budgetary
control is a process which help the organisation to determine the actual sales as per the budgeted
figures for a specific period of an organisation (Lukka,and Vinnari, 2014).
Tools that can be used in budgetary planning are :
Flexible Budget : It is a planning tool used in budgetary control in which the volume and
the activity can be changed as per the requirement of the organisation. Airdri Ltd. can use this
budget as they can easily modify the level of sales, level of production etc. on the basis of
changes that are taking place in the business operations. It will help the company in planning as
well as controlling.
Benefits : It is beneficial for them as they can determine the level of production in the market
and on that basis they can easily modify their level of production. Also it facilitate Airdri Ltd to
adjust the quantity of the products that they have to produce to achieve their desired level of
profits (McNeil,Frey and Embrechts, 2015).
Limitations : The limitation of this tool is that it required skilled and competent staff who can
easily and frequently manage changes in their level of performance. Flexible budgets are
comparatively costly approach and depended upon financial disclosures, if they are not accurate
then the entire budget will lapse.

Master Budget : It is nothing but combination or sum total of various lower level budget.
In this all the divisional budgets are summed up in one budget which is prepared by all the
department. It includes cash flow forecast, financial planning, budgeted profit and loss etc. Airdri
prepares this budget for a period of one year,
Benefits : This budget works as a summary for the management and the owners. It reflects all the
expected revenue and expenses in different departments. Also all the problems with different
department can easily be identified.
Limitations : It is difficult to update this budget as even to make a smaller change a lot of steps
need to be taken by them in the entire budget (Needles, Powers and Crosson, 2013).
M3 : Analysis of different planning tool
Planning tools are used by the organisation as it helps them to identify the possible issues
that can be faced by the companies such as short of funds, duplication of the activities by
different departments, over expenditures and many more. Airdri can use flexible budget and
master budget for their organisation as it will help them to anticipate the expenses and revenue .
Also flexible budget enable the organisation to adapt the changes easily.
TASK 4
P5 : Comparison of how organisations are adopting management accounting systems to respond
to financial problems
Financial problems are basically the difficulty in repaying the debts of the organisation.
Such problems arises before the organisation in case where they do not have adequate plans. This
can happen because of misrepresentation, default in accounting practices etc. The various
financial issues faced by the organisation is :
 Over-expansion : It may be the situation where the organisation plans for expansion in
multiple lines without analysing their financial strengths due to this they may face huge
losses.
 High promotional expenses : When organisation spend a lot on the advertising and other
promotional campaign to achieve their objectives and when they are not able to meet
them in that case they face financial issues (Suomala and Lyly-Yrjänäinen, 2012).
The financial problems can be resolved with the help of various various approaches such as:

 Financial governance : This methods helps the organisation to collect the financial
information and to ensure that all the accounting requirements are complied by the
organisation. It makes the financial statements authentic and thus decision taken by the
basis of such statements will also be perfect.
 Benchmarking : It is a approach in which the organisation determine their objectives on
the basis of the other organisation which is considered best in the industry. This approach
guides the other organisation to modify their performances as per the other to be
successful (Ter Bogt and Scapens, 2012).
A comparison between two organisation :
Basis Airdri Ltd. Dyson Ltd.
Financial problems The problem faced by them is
of high expenditure on
advertising.
The problem that they are facing is of
not able to meet up the sales targets.
Tools used With the help of financial
governance, this issue can be
resolved as they provide
accurate statements.
This issue can be resolved by
Benchmarking as they can set their
target as per other and can utilise
similar strategies.
Management
Accounting system
The cost accounting system can
be used by them to effectively
identify the cost associated
with manufacturing (Cost
accounting systems, 2013).
They can use inventory management
system so that they can effectively
manage the inventory.
M4 : Analysis of management accounting and financial problems
Financial problems arises due to inappropriate information which can be resolved by way
of various management accounting systems as they helps to prepare reports on the basis of which
better decisions can be taken by the management. This helps to resolve the financial problems
easily. The reports so prepared will also facilitate the management to identify the resources that
they have and accordingly they can plan for expansion.

D3 : Evaluation of how planning tools can solve accounting issues
Financial problems that are faced by the organisation can be resolved with the help of
various accounting and management tools. Also planning tools helps to make the estimates the
expenses and the sales volume. All these are planned on the basis of which the organisation
operates (Uyar, 2010). When they are planned and forecasted properly it helps the organisation
in effective decision making.
CONCLUSION
It is concluded from the above report that the organisation uses various management accounting
principles and methods which helps them in effective decision making. The organisation need to
use various tools to resolve the financial problems faced by them such as method of costing will
help to identify the maximum amount the organisation can use for advertising. Thus, the reports
from various accounting system helps in evaluating the performances.

REFERENCES
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Online
Cost accounting systems, 2013. [Online]. Available
through<https://accountingexplained.com/managerial/cost-systems/>.