Management Accounting System and Techniques

This document provides an explanation of the management accounting system, including its essential requirements and methods. It also discusses the application of management accounting techniques in preparing income statements using marginal and absorption costs. The document highlights the importance of management accounting in financial management and decision-making.

Assignment
Management Accounting
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Table of content
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
LO1: Explanation of the management accounting system..............................................................3
P1: Essential requirements of the different types of management accounting system....................3
P2: Methods of management accounting system.............................................................................4
Task 2...............................................................................................................................................5
LO2: Application of the Management accounting techniques........................................................5
P3: Preparation of the income statement by using the marginal and absorption costs....................5
Task 3...............................................................................................................................................8
LO3: Use of different planning tools in the management accounting system.................................8
P4: Explanation of the advantages and disadvantages of using the different types of planning
tools used for budgetary control......................................................................................................8
LO4: The process that should be followed by organisations to use the management accounting
system to respond the financial problems........................................................................................9
P5: The process that should be followed by the organisation to adapt management accounting
system to resolve the financial problems.........................................................................................9
Conclusion.....................................................................................................................................10
Bibliography..................................................................................................................................11
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Introduction
Accountability is a vital part of the business organisations. Organisations do different business
activities to survive in the industry. Therefore, organisations have to invest a lot of money to do
the business activities in an efficient manner. Organisations also have to adopt an accountability
process to calculate the expenses made in the business activities and keep the record of expenses
that will be used by the auditor to prepare the financial statement of the company (Fullerton et al.
2014, p. 420). Organisations have to calculate the cost of the business activities in an efficient
manner to minimize the cost of the organisations and maximize the profit of the organisation.
Organisation basically does their business activities for achieving different objectives but wealth
and profit maximization. Organisations can easily achieve the profit maximization objectives by
using the management accounting. Organisations prepare the budget for the business activities
by using past experiences and techniques of the management accounting. The preparation of
budgets provide organisations a detail information about the cost and income of a particular
business activity in the organisation. The following study will discuss about the application of
management accounting in the organisation to prepare such budgets for the business activities in
the organisations and the role of management accounting behind the success of the organisations.
Task 1
LO1: Explanation of the management accounting system
P1: Essential requirements of the different types of management accounting
system
Management accounting system played a vital role in the financial management department of
the organisations. Management accounting is a process by which organisations prepare the
sources of the capital to invest in the business activity, analyze the cost areas of the business
activity in which organisations have to invest the resources properly and communicate different
ideas that help the decision makers of the organisation to makes some effective decisions
towards the different aspects business activities (Otley and Emmanuel, 2013, p. 225).
Management accounting system is a combination of accounting, finance and management
therefore, this system provide relevant information associated with such activities in the
organisation. The skills and techniques of the management accountant not only keep the account
of the different business activities but also provide advice to the managers of about the
implication of different financial measures in the activities, take some major decisions in the
activity, formulation of different business strategies in the organisation to monitoring the risk and
maintain a sustainable success of the organisations. Organisations have to understand the scope
of the management accounting system to understand the requirements of this system in the
organization (Cooper et al. 2017, p. 455).
A) Management accounting system provide some relevant information about the status of
national and global economy that help the organisation not only to prepare some effective
financial strategy to finance the activities but also help to prepare the marketing and resource
management strategies to run the business activities of organisation successfully.
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B) Management accounting system also help the organisation to manage the performance of the
business activities by providing some relevant information associated with the performance of
the business activities. Management accounting measure the performance of the activities based
on the financial performance therefore, organisation can get a clear vision about the financial
performance of different aspects of the business activities in details (Ax, and Greve, 2017, p.65).
C) As management accounting provides different information about the national and global
economy therefore, the organisation can get a clear view about the risk associated with such
business activities. Management accounting also provide some tools and techniques to manage
such risk associated with the business activities.
P2: Methods of management accounting system
The all above scope of the management accounting system help the organisation to understand
the importance of the management accounting in the organisation. The study also provides a
brief information about the requirements of the management accounting to the organisation. The
importances of the management accounting system in the organisations are as follows:
A) Management accounting system provides clear information about the different sources of
capital that can be used by the organisation to meet the requirements of capital for doing the
business activities (Wagenhofer, 2016, p.115). Management accounting also help the
organisation by preparing different financial statements that will be used by the organisation to
attract the investors for the different capital market. Management accounting also provide some
measures to the organisation that can be used to satisfy the investors and attract more investors to
increase the capital of the organisations. Continuous flow of capital in the organisation help to do
the business activities without any interruptions for the supply of raw materials, power and other
essential resources in the business activities
B) Management accounting also help the organisation by providing relevant information about
the different aspects of cost associated with the business activities. Based on such information
management accounting system develop some budget for the business activities of the
organization (Van der Stede, 2016 p.101). Organisation gets a clear idea about the cost of the
activity and the amount of revenue generated from the activity. Management accountant also
provide some measures to minimize the cost of the activities and maximize the revenues
generated from the business activities. The minimization of cost and the maximization of
revenues help the organisation to maximize the profit and wealth of the company.
C) Management accounting analyzes the different aspects of cost associated with the business
activities in details and tries to get some vital information about the performance of the activities.
While the performance of the business activities are not well at this situation management
accounting try to identify the problems in the system of the activities for which the performance
of the activity suffering. Management accounting also try to create some solutions to do the
business activities in an efficient manner. Management accountant have to communicate with the
organisations for providing all such relevant information associated with business activities and
provide some effective measures to apply the solutions in the activity to solve the problems.
D) Management accounting also analyze the different aspects associated with the global and
national environment for the organisation. The detail analysis of the information associated with
the environment provides a brief knowledge about the changes in the economy, politically,
socially and technologically (Northcott, 2014, p.114). Such analyses help the organisation to
avoid the risk associated with the environmental factors. Management accounting is also analysis
the development of technological environment to get the information about the new cost
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effective machineries and production process. Management accounting suggest the company to
install and adopt such machineries and production process in the production activity to reduce
the production cost and improve the quality of the products. The low cost of production also
provide a competitive advantages to the in the market and the company can sale good quality
products at a low price. These measures help the company to maximize the market share in the
industry (Christ and Burritt, 2013, p.165).
E) The budgets prepared by the management accounting help the organisation to prepare some
efficient strategy to manage the activities in an efficient manner. Sometime management
accounting suggests the company to announce the interim dividend or bonus for the investors of
the capital market. That increases the price of the shares of the company in the capital market
and increase the goodwill of the shares of the company among the investors. Increment in the
goodwill and price of the shares attract more investors to buy the shares of the company that
increase the capital of the company.
The all above activities done by the management accounting system increase its requirements in
the organization (Contrafatto and Burns, 2013, p.355). In the present global situation of the
economy also increase the requirements of the management accounting system in the
organisation because it is not possible for the company to manage the business activities in an
efficient manner without management accounting system.
Task 2
LO2: Application of the Management accounting techniques
P3: Preparation of the income statement by using the marginal and
absorption costs
Management accounting system is using different types of techniques to manage the
performance of the activities of the organisation efficiently. The techniques of management
accounting system are as follows:
Financial planning: Maximize the profit of the company is one of the major objectives of the
management accounting system. Management accounting system prepares some appropriate plan
to manage the activities of the organisation. The financial plan prepared by the management
accounting system help the company to reduce the cost of the activity and increase the revenue
generated from the activity. In this way Company can achieve the objective of the profit
maximization because the differences between the cost and revenue present the profit of the
company.
Analysis of the financial statements: Management accounting also analyze the different
financial statements prepared by the organisations such as income statements, profit and loss
statement, Balance Sheet etc. The analysis of the income statement helps the .management
accounting to calculate the value of the shares in the capital market (Lapsley and Rekers, 2017,
p.175). Management accounting also suggest the price of the shares to the organisations to attract
more investments from the capital market. Management accountant analyze the profit and loss
statements to get some detail information about the expenditure and revenue of the company.
Management accountant analyze the balance sheet to provide detail information about the assets
and liabilities acquired by the organisation to the investors. Therefore, the investors can get some
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clear perception about the redemption ability of the organisation by sale the assets of the
organisation.
Cost accounting: Management accountant also calculate the cost associated with the different
business activities in the organisations based on the product, process, department and branch etc
of the organisation. Management accountant also compare the cost information with the
budgeted cost this comparison provide a detail information about the performance of the activity.
While the cost of the activity is higher than the estimated cost then the management accountant
tries to identify which aspects of the activities consume more cost than the expected and try to
solve the problem of the particular aspects to control the cost (Hill et al. 2014, p.105).
Fund and cash flow analysis: Management accountant also follow the techniques of analyzing
the flow of fund and cash in the organisation. The analysis of the flow of fund and cash in the
organisation help to determine the aspects in which organisation expense the fund and cash.
Organisation can get a clear perception about the source generation of the cash and fund in the
organisation and the aspects in which organisation expense the funds and cash.
Standard costing: Standard costing help to compare the estimated cost with the actual cost of
the business activities. The adoption of this technique by the management accountant helps to
determine the actual performance of the activity.
Marginal costing: The adoption of marginal costing by the management accountant of the
company help to determine the prices of the products determine the sales mix for the products
and help to use raw materials and other resources in the business activity optimistically. The
technique of marginal costing also help to take some relevant decisions about the buy or make
decision, expansion of the market in the other regions or import and export decisions.
Budgetary control: Management accountant also follow the budgetary control technique to
prepare the estimated cost and revenue for the business activities of the company. The company
tries to expense the resources according to the budget and generate revenues from the business
activities according to the budget. While, business activities cannot perform according to the
budget prepared by the company than the management accountant try to identify the issues for
which activity does not perform according to the budget and try to create some solution control
the budget (Noordin, R., 2016, p. 365).
Revaluation Accounting: In this this technique management accountant helps the organisation
by evaluating the value of assets acquired by the company. The continuous use of this technique
provides a clear perception about the value of the assets of the company to the investors.
Decision making accounting: Use of these techniques by the management accountant help the
organisation to take some effective decisions about the different business activities of the
organisation. Company can choose a profitable business activity from the alternative business
activities (DRURY, 2013, p.210).
Management Information system: The technique of management information system help the
management accountant to store the relevant information associated with the business activities
of the organisation. Such information helps the management accountant to prepare some budgets
for doing such similar activities (Strumickas and Valanciene, 2015, p. 263).
Apart from the above techniques management accountant use some other techniques such as
statistical techniques, management reporting, historical cost accounting and ratio analysis to take
some effective decisions about the business activities and use some effective measures to
improve the performance of such activities.
Preparation for the sales budget of the company:
Calculation of Net Profit using Absorption costing
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Calculation of Cost per unit for absorption costing
Amount
(£)
Direct Materials 6
Direct Labor 5
Variable Overhead 2
Fixed Overhead 3.33
Total per unit cost (£) 16.33
Sales = Price x Number of units sold (£) 21000
Price (£) 35
Number of units sold 600
Cost of Goods sold = Cost per unit x Number of units sold 9798
Cost per unit (£) 16.33
Number of units sold 600
Total selling and administrative expenses = Variable expenses + Fixed
expenses
Variable expenses = (£ 1 x 600 ) + £ 1300 £ 1900
Computation of net income
Amount
(£)
Sales 21000
Less: Cost of Goods Sold 9798
Gross Profit 11202
Less: Selling and Administrative expenses 1900
Net Income 9302
Calculation of Net Profit using Marginal costing Amount (£)
Sales 21000
Less: Marginal cost of goods sold 9798
Add: Opening Stock 0
Less: Closing stock 1633
Contribution 9792
Less: Fixed Overheads 1300
Net Profit 8492
From the computation of the above analysis it is inferred that a difference in the overall net profit
computed by the two different methods of accounting is noticed. This difference in the profit
figures calculated through two different methods is attributed to the treatment of ‘fixed
production overheads’. For the purpose of computing net profit through marginal costing
approach, the entire amount of production overheads related to fixed expenses is written off for
the given period. On the other hand, for calculating net profit through absorption costing ‘fixed
production overheads are carried forward between accounting periods as a component of valuing
the inventory.
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Explanation on the distinction between absorption costing and marginal costing
 Marginal costing is identified as one of the decision making tool or technique that is used
to ascertain the total cost involved in the process of production. On the other hand,
absorption costing is recognized as a process by which total cost is apportioned among
different cost centers with the aim of determining the total cost of production.
 Under marginal costing, variable costs are identified as product cost whereas the fixed
cost is identified as period costs. In case of absorption costing both the costs namely,
fixed and variable costs are identified as product cost (DRURY, 2013, p.210)..
 In marginal costing, the overheads are classified into fixed overheads and variable
overheads. In the case of absorption costing, overheads are classified in the form of
production overhead, administration overhead, selling and distribution overhead.
 In context to marginal costing, it is observed that any kind of variation in the opening
stock and closing stock does not create any impact on per unit cost of the output.
Whereas in the case of absorption costing, it is observed that variation in the opening
stock or closing stock results in affecting per unit cost of the output.
 In marginal costing contribution per unit is derived whereas in the case of absorption
costing net profit per unit is derived (Lapsley and Rekers, 2017, p.328).
 Calculation of marginal cost is considered to be part of modern management accounting
techniques whereas the computation of absorption costing is considered to be a part of
traditional management accounting techniques.
Task 3
LO3: Use of different planning tools in the management accounting system
P4: Explanation of the advantages and disadvantages of using the different
types of planning tools used for budgetary control
Budgetary control is an important tool in the management accounting system. Management
accountant can estimate the cost of the activities by preparing such budgets. The other
advantages of the budgetary control are as follows:
A) The major advantage of the budgetary control is it helps the organisation to establish a
relationship of the business activities with other departments of the organisation.
B) Budget helps the organisation to implement the strategic plan in the business activity to
manage the use of resources and revenues in the activities according to the strategies (Strumickas
and Valanciene, 2015, p. 279).
C) Budget provides some important information about the past experiences of the business
activities. Company try to avoid the past mistakes in the present business activity and implement
the effective measures learn from the past to increase the effectiveness of the activity.
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D) Budget also help the organisation to communicate with the employees to provide information
about the use of resources in the activity. Budget also provides some guidelines to the employees
for using the machineries and raw material efficiently in the production activity.
E) Budget also improves the resources allocation ability of the organisation by providing
important information about the requirements of the resources in the activity (Hill et al. 2014,
p.111).
F) Budget also provides a scope to the organisation for correcting the mistakes in the activity by
providing the reallocation tool.
Apart from all the advantages company also face some issues while using the budget in the
business activity. The issues create some disadvantages for the use of the budget in the
organisation. The disadvantages of the budgets are as follows:
A) The problem raise while the company apply the budget practically and mechanically in the
business activities.
B) The budget discourages the employees to work in the business activities because the lack of
participation of the employees while preparing the budget. Budget can provide some
unconditional pressure on the employees.
C) While budgets prepare with the high expectation of the company and the budget have no
relation with the reality for this reason the quality of the products of the company can be fall.
D) Budget can create some competition for resources among the different activities of the
organisation.
E) Budget reduce the scope of creativity and innovation in the activity and the employees are not
motivated to apply their creativity to complete the activity.
The overall impact of budget on the organisation is positive. Therefore, the organisation can use
the budget to complete the activities with cost efficiencies (Contrafatto and Burns, 2013, p.359).
LO4: The process that should be followed by organisations to use the
management accounting system to respond the financial problems
P5: The process that should be followed by the organisation to adapt
management accounting system to resolve the financial problems
The adaption of management accounting system in the organisational activities helps the
organisations to manage the activities with efficiency. Management accountant not only
determine the problems of the activity but also create some solutions to solve such problems of
the activity. Management accountant use different resources, techniques and tools to create the
transparency in the performance of the activities that help the organisation to evaluate the
performance of the activities. To adapt the management accounting system in the organisational
culture the company has to take some effective measures. Company has to provide full
authorization to the management accountant to access the financial information of the company.
Therefore, Company have to provide all financial statements to the management accountant that
the management accountant to determine the financial problem of the organisation. After
analyzing the financial statements management accountant can provide a brief knowledge about
the financial problem of the organisations and create some effective solutions to solve such
problems. Management accountant also can access the information about the performance of the
past activities of the organisation to prepare an efficient budget for the future activities of the
organisation. The analysis of the performance of the past activities also helps the management
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accountant to determine source of financial problems in the organisation. As the differences
between the cost and revenues represent the profit of the company for this reason the
management accountant use budgetary control to reduce and control the cost of production and
increase the profit of the company. Management accountant also prepare the standard costing to
measure the actual performance of the activities done by the organisation. In the standard costing
measure the performance of the activity based cost of the activities. If the activity consumes
higher cost than the estimated then there are some problems with the performance of the activity.
Management accountant try to determine the problems of the activity and create some solution to
increase the performance of the activity by solving such problems. In this way the companies
have to provide all financial information to the management accountant to adapt a string
management accounting system to solve the financial problem of the company (Christ and
Burritt, 2013, p.168).
Conclusion
Business organisations can adapt the management accounting system to improve the financial
status in the industry. The above study tries to provide a brief knowledge to the organisations
about the advantages and disadvantages of the management accounting system in the
organisation. The implementation of the management accounting system in the business
activities of the organisation also mentioned in the above study. The modern business
organisations also recognize the essentiality of the management accounting system to improve
the cost efficiency of the business activities.
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