Management Accounting: Systems, Techniques, and Benefits

This document provides an overview of management accounting and its systems. It explains different management accounting techniques such as job costing, price optimization, cost accounting, and inventory management. It also discusses the preparation of income statements using managerial accounting techniques and the benefits and drawbacks of budgetary control techniques. The document is based on Cream Ltd., an SME in the United Kingdom.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1: Explanation of various management accounting and their system.......................................3
P2 Different method that can be used in management accounting reports..................................5
TASK2.............................................................................................................................................7
P3 Preparation of income statements using managerial accounting techniques..........................7
TASK3...........................................................................................................................................12
P4 Benefits and drawbacks of budgetary control techniques....................................................12
TASK4...........................................................................................................................................17
P5 Effect of management accounting technique in solving financial problems........................17
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................21

INTRODUCTION
Management accounting is terms as an activity of maintaining record of intrinsic
information about an organisation so that it makes easy for management to make a better and
profitable decisions for further growth and success of an organisation (Biondi, Gulluscio and et.
al., 2017). Keeping such report helps stakeholders such as customers, employees, shareholders
etc. to identify actual financial performance of an organisation so that they can decide whether to
stay with company or not. The present assignment report is based on Cream Ltd. Which is
engaged in provide wide range of products such as ice-cream, waffles, doughnuts etc. It is SME
operated in United Kingdom. The report explains the concepts of management accounting and its
systems and reporting. Along with this, use of different costing methods for the purpose of
calculations of net profit are also summarised under this report. The report also covers planning
tools to control budget and use of MA in resolving financial issues of an organisation.
TASK 1
P1: Explanation of various management accounting and their system
Management accounting: It is a branch of accounting in which transactions are
collected, measured and recorded for the purpose of taking essential financial decision. In other
words, it is a process of formulating managerial accounting policies with the use of accounting
data. Organization use this technique for optimum utilization of their resources by taking
effective decision. This tool of accounting is used by internal department of Cream Ltd..
Managers of Cream Ltd. uses different management accounting systems for the purpose of
taking necessary decisions. Success of plans and policies of internal department is depending on
how effectively their managers use management accounting system of their department
(Bromwich and Scapens, 2016)
Differences between management and financial accounting:
Basis Management accounting Financial accounting
Meaning It facilitate management to
make accurate profitable
decision and plans for
operating business more
effectively.
It mainly focuses on preparing
final accounts of business so as
to know their actual financial
stability in the market.

Compulsion It requires only when business
operations are not running
effectively.
It is compulsorily required for
company to prepare financial
statements so as to retain their
loyal stakeholders.
Prime motive Providing useful information
on various business matters so
as to make suitable plans and
policies.
To provide financial
information to interested
stakeholders.
Time frame Reports are prepared only if
there is requirement of
business
Annually
Types of management accounting system:
Job costing system: It is essential part of managerial amounting. Under job costing
system managers allocate cost of producing specific task products. Cost of each activity are
analysis and recorded in statements. These types of system is useful in those industries which
produced limited and specific products on demand of their customers. For example, producing
wide range of products such as ice-creams, waffles etc. by Cream Ltd., using such system helps
managers in allocating cost to different product according to the growth in their sales and
revenue(Eldenburg, Krishnan and Krishnan, 2017)
Price optimizing system: This system is applied by organizations to decide pricing rate
of their products. Managers decides price on the basis of analyzing entire market conditions.
They set price which gave satisfaction to customers and also provides financial gain to the
organization . Managers uses various strategies to set their price. Business organizations various
strategies of price like skimming, penetration and etc. They decide their price of product on the
basis of industrial life cycle product. In the context of Cream Ltd., identifying perception of
customers towards pricing policy of company, it makes easy for manager to make relevant
changes in their existing pricing policy which increases customer satisfaction level as revenue.
Cost accounting system: In management accounting tools cost accounting is also play
important role. Business organizations uses this system to analysis cost incurred in
manufacturing of products and then formulated polices which help in minimizing cost. This

system is useful for every kind of industries either it is small or large size of enterprises. Cost
accounting system has very large criteria. In the context of Cream Ltd., analysing total cost
incurred in manufacturing of products makes easy for manager to set margin and charge prices
from customers accordingly (Ferdous, Adams and Boyce, 2019)
Inventory management system: Inventory management system is used to monitor and
control the stock products, which may be the asset, raw material, deliveries, supplies or product
which is ready to dispatched to the customers. This is a technological software used for tracking
the inventories of the company and as gives the information related to the stock which is helpful
for to control the stock or outages. There is a use of barcode scanning process which includes all
the detailing of product used to maintain the record. In the context of Cream Ltd., identifying
level of inventory reduces changes of failing customers needs and requirements which makes
strong brand image into the market .
P2 Different method that can be used in management accounting reports
Management accounting reports defines the management of reports which provides
financial information. It has been preparing to analyse the profit, loss, gain, expense, etc. which
is needed to the company to increase its profitability index by increase its sale and reduces the
losses or to fulfil the loopholes that directly helps to grow even more faster. To manage the
reports it is more effective and efficient way for Cream Ltd. to keep the records of all the
activities perform in a particular period of time that is helpful in future forecasting. There are
several methods used to manage the reports by the management of Cream Ltd. these are as
follows as:
Budget reports - This is a report used for budgeting the certain task and hold back the
productivity by the management department. Budget reports is being used to compare the
performance or set the standards for every task. As it calculates the difference between the actual
and calculative cost thus it is helpful for Cream Ltd. to accomplish the task with more
consistency and improves the performance of the company. This is also used for forecasting the
future costing which is beneficial for the growth and development of the company (Hiebl and
Mayrleitner, 2019).
Performance report - Performance reports defines the individual, group or company
performance. It is useful to define the growth of individual by analysing the performance
because growth can only be achieved by better performance. Performance is being analysed to

provide bonus, incentives, perks, promotion, etc. to the employee which builds the motivation
and self-confidence to achieve the individual and company's goals and objectives. So
performance report is needed for Cream Ltd. to measure the growth of all.
Inventory management report – It is also necessary to control and manage the stock
reports as excess inventory or less inventory both is harmful for the company and in both the
cases company bears the loss. As every company such as Cream Ltd. deals with different product
and provide different services on that thus by which company manage to gain the profit for that
the control on production is much needed and that is control by inventory management reports.
Also manage according to the need and demand of customers as much the product is in demand
that much the stock is needed and if the product is not in demand the stock will also be not
needed (Thomas, 2016).
Accounting receivable report - Accounting receivable reports are the report of those
sale whose payment is not received by the company at a particular period of time. It is useful for
Cream Ltd. to compare the profit and loss of the company and also reflects company's
performance. It keep the record of credit sale and enlist those payments which is not pay at in
order to services ordered by the customer. This can be used by manager of Cream Ltd. to
measure the performance of the company as it defines the financial stability of the company and
also used to make budget and set target according to the previous reports.
The accounting management reports is used to measure the financial performance of the
company which involve the budgeting, inventory control, accounting receivable reports. It help
managers of Cream Ltd. in decision making, strategies, plan formation to gain the profit at a
certain period of time. Company need to prepare these reports to evaluate the performance and
deal with threats and grab the opportunities to enjoys the profit. This is also needed to present the
report in the market for the shareholders as they invest in the company and for market value as
well (Fiondella and et. al., 2016)
M1 Essential requirements of management accounting systems
Every organisation wants to sustain in competitive market for long duration which can be
possible only the suitable plans and policies formulates. In the context of Cream Ltd., it is
important for management to utilise different management accounting system for beneficial
purpose for an instance, using of price optimisation system drives managers to update their
existing pricing strategies after acknowledging perception of customers towards their existing

pricining policy. This will retain loyal customers with company for longer duration. Another
instance of getting fruitful outcome for using management accounting system includes inventory
management system which communicates managers about the level of inventory available with
company at present so that further decision could be made regarding ordering further stock in
order to meet client’s requirements. This will increase brand image and loyalty in market.
D2 Management accounting system and management reporting system are integrated with
process of organisation
The management accounting and reporting systems of an organisation are integrated as
with the help of accounting system various reports of the company like financial statements etc.
can be produced which help in determining the financial position of a company. The accounting
system of a company help in recording the transactions that occur in company so that records can
be maintained. Thus it can be said that both the systems are integrated which help the company
in maintaining effective records of the company.
TASK2
P3 Preparation of income statements using managerial accounting techniques
Cost: It is an incurred amount in production process on the basis of which pricing
strategy for products are formulated by the management of an organisation. It includes two kinds
of costing methods which are used to calculate net profitability (Cost accounting systems, 2013).
Here are such methods that can be used by Cream Ltd. To calculate net profit:
Absorption costing method: It is also known as full costing method due to including both
fixed and variable cost. It reflects true and fair financial position of an organisation which helps
in retaining their loyal stakeholders. Such kind of method is mostly used by large sized
organisations.
Marginal costing method: It is also known as variable costing method due to considering
only variable cost and ignoring fixed cost. It is used by SME such as Cream Ltd. as it helps them
in showing high profitability of company than actual under financial statement with a motive of
attracting shareholders to provide them financial support.

M2 Management accounting technique and financial reporting documents
With the help of management accounting techniques like marginal and absorption costing
the management of an organisation can effectively mange the budget so that sufficient funds can
be available wit the company in achieving its goals and objectives. The company can identify its

financial position with the help of these tools so that the monetary data can be effectively
managed.
D2 Financial report which apply to interpret business activities
Various types of financial reports like budget reports, account receivable ageing reports,
cost accounting managerial reports etc. help the managers of company in identifying the
deficiencies and variances in an organisation (Ndemewah, Menges and Hiebl, 2019). This help
the management in identifying the effectiveness of business activities so that company goals can
be achieved so that efficient decisions can be made through strategic planning in order to achieve
long-term benefits.
TASK3
P4 Benefits and drawbacks of budgetary control techniques
Budget: budget is a process which defines the calculated and estimated result of funds as where
to invest and how much to invest for specified period of time in future. budget can be made by a
family, an individual, a group, by company, etc. It is for to manage the financial funds.
Types of Budget:
Cash budget: -
Cash budget is a forecast of the total amount of receipts and payments made by a company in a
financial year. This is a demonstration of inflow and outflow of cash in an entity in a specific
time, so that the estimation for working capital and other expenditure can be made to sound
working of an organisation. This is the budget which is prepared by Creams Ltd. primarily
before any of the budget so that close estimation can be made for other budgets and any cash
discrepancies can be found this will help the company to maintain ample cash balances (Lowe,
2019).
Objective of preparing cash budget:-
 To forecast liquidity position of company.
 To predict cash position of Creams Ltd. whether shortfall or surplus.
 To estimate the time when cash will be required so that source of finance can be selected
accordingly.
 To control over expenditure cash where funds are at shortfalls.
 To perpetuate balance between cash, working capital needs, loans and advances made.

 It depicts monthly cash requirement so that finance manager can wisely use funds and by
this funds will not be idle and cash will be in reserve when required.
Static budget:-
A static budget is prepared before commencement of a new financial year and on the
basis of revenue generated in last year. It is forecast of expenditure and income over an
upcoming financial year irrespective of the change in level of activity i.e. it remain unchanged
even if sales volume and production quantity fluctuates. Static budgets are made to evaluate
financial soundness of a company over a span of time (Chenhall and Moers, 2015)
Objective of preparing static budget:-
 To mark costs, expenditure, income of a company and to determine financial position of
company.
 To ensure that all the subdivision are under the budget by this companies can keep all the
department on proper track and prevent from deviation.
 It leads to the proper management of cash flow in the organisation so that cash can be
obtained on time when needed.
 To maintain record of field where amount is spent, from where money is coming and
what are the future expectations of flow of funds.
 It helps in calculating performance for a period of time since the amount of expenditure is
evenly spread and hence it become easier to evaluate performance since it is easier because sum
of money apportioned to each month is the same.
 It creates roadmap of income and expenditure of a company so that it can be followed
accordingly.
Planning tools to control budget
1. Master budget:
A master budget is the combination of all the budgets prepared by all the divisions. It is the
concise form of all divisional budgets made, this is not the biggest budget but it is a summarised
form of all the budgets. Master budget can be used in enlargement of business because it covers
all the aspects of business and makes the process of decision making easy (Endenich, Trapp and
Brandau, 2017) Master budget anticipates detailed knowledge about sales capacity, production

volume and overall cost of the Creams Ltd.. It establishes a linkage between all the departments
and synchronizes them in a orderly manner.
Master budget includes production budget, sales budget, cash budget, capital budget, direct
material budget, direct labour budget, production overhead budget etc.
Advantages:
 This works as motivation since planning of whole the year is done in advance.
 It gives overview about how much income company is receiving and how much company
is disbursing by this chances or imbalances in income and expenditure decreases that
means the chances of facing deficit decreases.
 It is easier to find out that which department is spending more so corrective actions can
be carried out, finance manager is not required to look into each department to tally cost
expenditure. It boosts the communication among all the departments so conflicts between departments
decreases.
Disadvantage:
 It is not easy to understand since all the budgets are summarised into one.
 It became difficult to find out that error is made in which budget as they are summed up
into one.
By preparation of Master budget Creams Ltd. can motivate its employees and they can get to
know about the actual financial picture of company. Creams Ltd. can level up their expenditure
of all the departments so that remedial actions can be taken out if any department is spending
more than demanded. Master budget will lead to the formation of bonds among all departments
this will create healthy environment in the organisation (van der Poll and Mthiyane, 2018)
2. Flexible budget:
A flexible budget is prepared for more than one level of activities so that expense can be
taken out for each level of activity. As the name itself says it is flexible with each production
level. It is used to identify the cost adsorption by each production level as to estimate the most
profitable level of activity so that a company can run their business on that activity level to
maximise their profit. So it can be concluded that flexible budget is a mechanism to compare the
current performance and budgeted performance of different levels of production.

Advantages:
 Company will get to know about extraordinary income and seasonal expenditure if
occurring in any budgeted level of activity.
 By the help of flexible budget cost control measure can be fixed appropriately.
Disadvantages:
 Although it is a tool to increase efficiency of business so it needs high knowledge of
finance so a minor mistake can leads to a big reflection.
 It is complicated to create, a normal fixed budget needs arithmetic calculation but flexible
budget needs algebraic calculation.
By preparing flexible budget Creams Ltd. can recognise their variation from fixed to budgeted
activity level so that they can establish cost control measure on time and in effective manner to
control cost. By calculating profit for each possible activity level Creams Ltd. can select the
activity which is yielding high profit and least cost (Oyewo, 2017)
3. Variance analysis:
Variance analysis is a significant measure to calculate the deviations from actual and planned
performance. It is used to get control over the business so that the reasons of variations can be
found easily and correctional plan can be implemented promptly without any delay. It is used to
measure the budgeted cost application versus actual cost application in a manufacturing concern,
any additional application is termed as deficit and reduced cost is termed as favourable amount.
A company prefers to have cost variances as favourable and output variances as adverse.
Advantages:
 By this management will get to know about all the adverse divergent and they get
pertinent facts about them.
 Management can take advantage of their cost benefit in some investment and make
profits thereon
 Identification of underutilised assets can be obtained and further can be efficiently
utilised.
Disadvantages:

 It is a time taking activity which consumes so much time to carry out the impact of
variations.
 It is difficult to apply these methods in a service industry since these principles are
specifically made for manufacturing concern.
By analysing variances Creams Ltd. can understand reasons of variations in entity and action
plan can be made. It helps the organisation to accomplish its continuing goals so that targets can
be reached on time with no adverse effect.
M3 Usage of different planning tools to prepare and forecasting budget
Various types of planning tools like contingency tool, frequency tool and budget help an
organisation in determining the way in which expenses need to be done so that the budget of
company can be monitored and unnecessary expenses can be controlled. With the help of these
tools the cost of company can be reduced so that the efficiency of company operations can be
improved so that the business activities can be completed within determined budget.
TASK4
P5 Effect of management accounting technique in solving financial problems
Financial problem is terms as an issue which can affect the financial performance of an
organisation. As every organisation wants to attain strong financial stability in market but due to
several causes they faced financial issues that can restrict them to achieve their desired goal.
Here are the causes of financial issues that can be faced by Cream Ltd.:
Causes of financial issues faced by an organisation:
1. Lack of liquid funds:
Without sufficient liquid funds Cream Ltd. cannot be operated in an expected manner,
management will not be able to meet their short-term obligations, and this will be reflected in
financial statements of entity, this can impact the goodwill of an entity. When debtors of a
company increase and demanding some more time for settlement but at the same time creditors
are due then company is required to pay to them this will harm the liquidity (Nyamwanza,
Madzivire and Madzivire, 2020)
2. Credit crunch: Businesses faces credit crunch problem due to change in consumer taste and
preferences and change in economic cycle. Management of every organisation is required to plan

for unavoidable future crises so that when these kinds of crunches arises working of the entity do
not get disturbed.
3. Insufficient planning of money:
In every organisation such as Cream Ltd. planning to each resources is necessary,
insufficient planning leads to wastage of funds and shortage of funds when needed. Insufficient
planning can make huge losses and consequently it impacts on whole the business and internal
workings so the budget preparation can be erroneous.
Tools to resolve financial issues:
1. Balanced scorecards:
It is a performance measure tool used by management personnel to determine enactment of
activities performed by workforce with strategic goals of organisation so that the repercussions
can be find out. In balanced scorecard it is to be checked by the manager of Cream Ltd. that
company is getting how much return on its investments, whether customer satisfaction is
obtained or not, the organisational procedures are as to attain strategic goals and what perception
employees hold towards organisation i.e. whether they are motivated and satisfied or not.
Importance:
 It helps the organisation to plan in a better way and to implement strategies, it built a
relationship between different strategies and creates a strategic map.
 It helps organisation in mapping their projects efficiently so that it can impact in long run
profit earning capacity of business (Christensen and Himme, 2017).
 It tells about the important aspects of a business and aims at the areas which are most
important to the business point of view.
 It helps in preparation of budgets and aspects of capital budgeting, so that the correct
position of an entity is evaluated.
2. Benchmarking:
Benchmarking is a process of analysing products, services of a company with the leading
organisation of a that particular industry. It is used to determine success of a company in
compare to the company who is leader of that field and if any space is found then that is required
to rectify and should be matched as per the standard of leader company.
Importance:

 By benchmarking a company can evaluate its performance to its nearest competitors and
take stand in the market.
 Benchmarking bridges the gap between poor performance and good performance and
suggests for corrective measures.
 Benchmarking develops a standardisation of processes to be followed in an organisation
by this performance of overall workforce can be increased and a standard can be set up
thereon.
 It stimulates the culture of continuous improvements and by this performance can be
updated and improved as per the quality required (Alam, 2017).
Comparison of two similar organisations in context of techniques used to deal with
financial issues:
Basis Creams Ltd. Kelly’s
Financial issues Such association faces
financial issues due to poor
planning of investing money.
This damages the financial
stability of an organisation.
Such company faces financial
issues due to credit crunch.
Changes in taste and
preferences of customers
affects the sales of company in
adverse manner.
Technique Financial governance is best to
adopt as it directs manager to
record actual data in financial
statement following all the
polices and rules made by
company.
Benchmarking is best to use by
such company as it drives
managers to set target of
identifying actual preferences
of customers and accordingly
invest funds in producing
goods which are more in
demand.
Use of management
accounting system
Cost accounting system is best
to use by company as it makes
easy for manager to calculate
total cost incurred in
production process and make
Price optimisation system is
best to use by such company as
it help in identifying the actual
perception of customers
towards company’s existing

budget accordingly. pricing policy. This will direct
business to update their pricing
policy accordingly.
D3 Various planning tools to resolve financial problems
Various types of planning tools can be used by an organisation so that the financial
problems of company can be reduced so that the company can continue to survive sustainably in
the market and achieve high profits (Alam, 2017). Also the company can complete its business
activities within the budget which is ascertained by the company so that the costs of company
can be controlled.
M4 Management accounting in response to financial problems can lead organisation to
sustainable success
Management accounting can help an organisation in dealing with the financial problems
as the budget of the company can be efficiently managed so that costs of company can be
controlled which can help in reducing the financial problems of company. Also other financial
issues related with lack of employee motivation, mis-utlisation of resources etc. can be
efficiently dealt with the help of tools like KPI, Benchmarking etc.
CONCLUSION
It can be concluded from the above discussion that management accounting helps
management in making better and profitable strategic decisions and plans for further
improvement in financial stability of an organisation by recording and analysing the financial
data on specified time period. There are different costing methods such as absorption and
marginal costing which can be used according to the business objectives. Along with this, several
planning tools are used to control budget such as flexible, master budget etc. that controls
unnecessary expenses of an organisation. MA plays a significant role in resolving financia issues
as well by analysing the total cost and level of inventory so that business cost can be incurred in
efficient manner.

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