Management Accounting Fundamentals and Techniques

This report introduces the fundamentals of management accounting and explores various techniques used in the field. It discusses income statement through marginal costing and absorption costing, advantages and disadvantages of planning tools, and the adaptation of management accounting systems to solve financial problems and achieve sustainable success. The report also includes examples and calculations to illustrate the concepts. Find study material, solved assignments, and essays on management accounting at Desklib.

Management
Accounting

INTRODUCTION...............................................................................................................3
TASK 2...............................................................................................................................4
P3 INCOME STATEMENT THROUGH MARGINAL COSTING AND ABSORPTION
COSTING TECHNIQUE:...................................................................................................4
M2 Range of management accounting techniques:..........................................................8
P4 Advantages and disadvantages of different types of planning tools used for
budgetary control:............................................................................................................10
M3. Different planning tools and their application for forecasting budgets.....................12
P5. Adaption of management accounting systems to respond to financial problems and
sustainable success:........................................................................................................13
M4. Sustainable success through solving financial problems by Management
Accounting:......................................................................................................................18
CONCLUSION:................................................................................................................19
REFERENCES................................................................................................................20

INTRODUCTION
The objective of this report is introducing the management accounting fundamentals
which can be practice in the wider business environment (Agrawal and Cooper, 2017).
This project report will investigate about uses of management accounting financial data
to get planning decisions and the monitoring and control of finance within organizations.
This project report consists of two types of Income statement; Income statement
through marginal costing and Income statement through absorption costing methods.
How to solve financial problems of the business is discussed in this report. To
understand how marginal and absorption costing methods work, calculations has been
done which shows treatment of direct and indirect costs. There are many financial
problems and issues like low credibility, less revenue, poor cost estimation,
mismatching of data’s in financial statement and high debts taken from the market.
These threats can weak Company’s wealth. To handle such threat there are some tools
and techniques of management accounting systems which help business to overcome
from these financial issues. How these tools solve firms problems are shown in the
project. Additional to solving threats, the concept of sustainable success also discussed
in respect with management accounting systems.
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TASK 2
P3 INCOME STATEMENT THROUGH MARGINAL COSTING AND
ABSORPTION COSTING TECHNIQUE:
Quarter 1 & 2
First we need to calculate product cost per unit:
Quarter 1 Quarter 2
Variable Cost
(78000 × 0.65) 50700 42900
+ Fixed Cost 16000 16000
= Total Product
Cost 66700 58900
÷ Total Units
Produced 78000 66000
= Product Cost
Per Unit 0.85 0.89
After that the product cost per unit used to create the absorption income statement
(Alam, 2017). The Units sold on the income statement (and not units produced) taken to
determine sales, cost of goods sold and any other variable period costs.
Quarter 1
Sales (66000 × £1/ unit)
6600
0 Sales (74000 × £1/ unit) 74000
- COGS (66000 × 0.85)
5610
0 - COGS (74000 × 0.89) 65860
Gross Profit 9900 Gross Profit 8
1
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4
0
Less: Operating Expenses: Less: Operating Expenses:
Selling & administ.
Expenses 5200 Selling & administ. Expenses 5200
Net Operating Income 4700
2
9
4
0
Note: 1. Selling cost / unit is assumed to be £1/unit.
2. Variable cost/ Unit = Total variable cost/ No. of units produced
= 52000/80000 = £0.65/ unit
3. COGS = Cost of goods sold
Income statement through Variable costing technique:
Quarter 1
Sales (66000 × £1/unit)
6600
0 Sales (74000 × £1/unit) 74000
Less: Variable Cost Less: Variable Cost
Cost of Goods Manufacturing
(78000 × 0.65)
50700
Cost of Goods
Manufacturing (66000 ×
0.65) 42900
Less: Closing Stock (12000 ×
0.65) 7800
Add: Opening stock (12000
× 0.65) 7800
Less; Closing Stock (4000
× 0.65) 2600
Contribution Margin
2310
0 Contribution Margin 25900
Less Period Expenses Less Period Expenses
Fixed Manufacturing cost 16000 Fixed Manufacturing cost 16000
Fixed Selling and Admin.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
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Net Operating income 1900 Net Operating income 4700
Explanation:
Cost of goods manufacturing is calculated by multiplying total production with variable
cost per unit (£0.65/Unit). Cost of Goods manufacturing is expense so it is subjected to
be subtract from Sales revenue. On the other hand Closing stock is subtracted from
total variable cost because this stock has not been sold and should not be subtracted
from Revenue.
Difference in Profit & Loss or Income statement calculating by Absorption and Variable
techniques:
Absorption costing Variable Costing
Quarter 1
Sales (66000 × £1/ unit)
6600
0 Sales (66000 × £1/unit)
6
6
0
0
0
- COGS (66000 × 0.85)
5610
0 Less: Variable Cost
Cost of Goods
Manufacturing (78000 ×
0.65) 50700
Less: Closing Stock (12000
× 0.65) 7800
Gross Profit 9900 Contribution Margin 2
3
1
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0
0
Less Period Expenses
Less: Operating Expenses: Fixed Manufacturing cost 16000
Selling & administ. Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating Income 4700 Net Operating income
1
9
0
0
Interpretation: As from the above figure, the clear difference between Net operating
incomes from both the method is shown. The major reason behind this difference is that
in absorption costing technique cost is calculated only of those products which has been
sold, while in variable costing method total cost is calculated for total products
produced.
Absorption costing Quarter 2 Variable Costing
Sales (74000 × £1/ unit) 74000 Sales (74000 × £1/unit)
7400
0
- COGS (74000 × 0.89) 65860 Less: Variable Cost
Cost of Goods
Manufacturing (66000 ×
0.65) 4290
0
Add: Opening stock
(12000 × 0.65) 7800
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Less; Closing Stock
(4000 × 0.65) 2600
Gross Loss 8140 Contribution Margin
2590
0
Less Period Expenses
Less: Operating Expenses: Fixed Manufacturing cost
1600
0
Selling & administ.
Expenses 5200
Fixed Selling and Admin.
Expenses 5200
Net Operating income 2940 Net Operating income 4700
Additional to the Income statement; BEP (Break even point analysis) is a strong tool to
identify the units at which company can attain a situation of no profit no loss. BEP of
above case is calculated below:
Break even point (In Units) = Fixed costs / (revenue per unit – variable costs per unit)
= £16000 / (£ 1/unit - £0.65/ unit)
= £16000 / £ 0.35/unit
= 45714 units
These 45,714 units is the total production required by a firm to attain no profit no loss
situation. BEP can also express in pounds:
Break-even point (Sales in £) = Sales price per unit × BEP in units
= £1/unit × 45714 units
= £45714
Interpretation: Company should generate 45714 pound sales revenue to attain no profit
no loss situation.
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M2 Range of management accounting techniques:
There are various management accounting techniques which helps company in
achieving its objectives, these are discussed below:
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1. Margin Analysis: This technique helps company in avoiding overproduction
situations (Appelbaum and et.al., 2017). It helps company in knowing the unit
to be produced to attain no profit no loss situation through breakeven point
analysis.
2. Constraint analysis: This technique helps company in evaluating the hurdles
which stops company in achieving optimum production and increased
revenue. It also states the reason behind this hurdle and provides suitable
solution.
3. Capital budgeting: This is very helpful tool or techniques which helps
company in taking strategic decisions related to capital expenditures
(Francioli and Quagli, 2016). In this method NPV (net present value) of all
investments is calculated to know which expenditure can give more returns.
4. Inventory valuation: This technique helps operation managers to know what
the actual cost is related with inventory. In this method direct and indirect
cost of production is separated to get the amount which directly impact
inventory production.
5. Trend Analysis: In this technique future estimation about revenue and
expenses is done to know how much fund is required to achieve desired
sales.
P4 Advantages and disadvantages of different types of planning tools
used for budgetary control:
1. Budget control:
Advantages and Disadvantages of Budgets:
Budgetary control
Advantages Disadvantages
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Coordinates important information
across staff managers.
It applies mechanically and rigidly
Interpret strategic plans and put
them into action.
Due to lack of participation,
employees can de-motivate.
Provides record of different
organizational activities.
Perception unfairness situation
arises.
Improves relations with employees
through sound communications.
Politics and resources competition
arises.
Improves resource reallocations A rigid structure decreases initiative
and advancement at lower levels,
making it impossible to get cash for
another new project (Planning Tools,
2020).
Provides corrective action tools.
2. Cost volume profit analysis:
Cost volume profit analysis
Advantages Disadvantages
Simplicity of figuring, utilizes a lot of
standard recipes, numbers can be
changed rapidly to decide changes in
factors.
Accuracy: it accept all expense are
fixed, anyway there are blended cost
that changes with creation.
Planning: the breakeven point assists
supervisors with assessing future
spending and entire creation influence
the targets of the business.
Accept deals stays steady yet interest
for an item can change after some
time.
3. Pricing strategy:
Pricing Strategy
Advantages Disadvantages
Client base valuing takes a look at the
objective whether client is happy to
pay for the item to decide the perfect
cost, this outcomes sets the price to
be charged from customer.
The executives valuing, the item is
estimated at what the organization
perceive not what actually customer
can pay. This creates a gap between
actual price and what price should be.
Cost based pricing accepts and deals
stays steady yet interest for an item
can change after some time.
Cost base pricing confuses managers
and they fixed the price more than
competitors.
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M3. Different planning tools and their application for forecasting
budgets
There are various planning tools used by company:
1) Budget control: The budget is a quantitative as well as fiscal articulation
of approach for a characterized future period.
Application: It applied to forecast arranged incomes and costs for request
to accomplish the organization's objectives (Georgantopoulos, Poutos and
Eriotis, 2018). In this manner, it is related to the administrative and
bookkeeping capacity of the business.
2) Cost volume profit analysis: Cost volume benefit examination is utilized
by the executives as arranging instrument to assess income from deals,
cost and benefits, this is finished by utilizing a scientific assessment that
ascertains whole changes to deals volume and cost influence benefit in a
future period.
Application: Cost volume benefit investigation is applied by the executives
to forecast the equal initial investment purpose of an item this is the point
that benefits from pay rises to the expense to deliver an item along these
lines there is no misfortune no benefit now (Hyndman, 2016).
3) Pricing strategy: Deciding standard price is difficult task for every
business, because company requires experts who have perfect knowledge
of customer demands, latest trends of the market and can do cost analysis
at different level of operations. The basic steps involved in deciding price
is searching price charged by competitors for similar product.
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Application: It is applied to forecast how firm can minimize its cost to meet
competitive price and finally implement this strategy under experts’
supervision (Johanson and Madsen, 2018). Then the goal is decided,
management pick an approach mulling over interest, cost, contenders
costs and offers, and valuing strategy. In budgetary control pricing strategy
helps in getting the sales revenue figure (Sales per unit × Units produced).
P5. Adaption of management accounting systems to respond to financial
problems and sustainable success:
There are various tools which are helpful in facing financial problems of the
company and achieving sustainable success. These management accounting tools
are discussed below:
1. Demand forecasting: It is the craftsmanship just as the study of foreseeing the
imaginable interest for an item or administration later on (Lee and Herold, 2018).
This forecast depends on past standards of conduct and the proceeding with
patterns in the present. Henceforth, it isn't just speculating the future interest yet
is assessing the interest experimentally and equitably. Through forecasting
demand company get information about latest trends of the market and built
product accordingly to match the demand.
Solution to financial problem: Through forecasting demand company can solve
financial problems like shortage of funds, underperformance, under valuation of
assets and decrease in revenue through giving information in advance. There are
different types of methods by which financial problems can be solved:
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 Buyer’s choice survey
 Collective opinion method
 Barometric method
 Market experiment method
 Expert opinion method
 Statistical method
 Least square methods
Comparison: These planning tools are mostly used manufacturing organizations
to avoid the situation of overproduction. Organizations which are in wholesaling
don’t have much use of this.
2. Make or buy decisions: Make or buy decisions commonly rise when a firm that
has developed a thing or part or basically adjusted a thing or part is encountering
trouble with current suppliers, or has diminishing breaking point or advancing
solicitation (Nishimura, 2019). It is not an easy task to take such decisions
normally, company requires lots of analyses like preparing zero based budgeting,
seeing future relations with suppliers and evaluating whether company has
enough capacity to produce specific product or not. Additional to this, it is also
required to find whether the product which company wants make or buy effect
core business of the business if Yes then it should go for making that stock
otherwise it should buy or acquire particular business.
Factors that compelling business to buy product from outside:
 Technical experts are not available
 Suppliers have strong network and good enough to do research or
suppliers are stronger than buyer
 Product is available at less cost.
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 Products required for shorter period.
 Capacity is not enough to do production.
 Company doesn’t want direct managerial control.
 Time is less for delivery.
 Brand preference
 Less valued item or non core product.
Solution to financial problem: Financial problems like over expenditure, delay in
processing time, etc. Can be solved through estimating cost on whether to make
or buy product, company fulfilled demand on time and also increase its Net
revenue through minimizing overall costs.
Comparison: It is most suitable for manufacturing organizations as they need
to decide whether to produce or buy the product (Oyewo, 2016). Service
organizations not use this tool because they only provide services like reselling,
customer service, hospitality, etc.
3. Activity based costing: Activity based costing (ABC) is a costing system that
dispenses over headed and underhanded costs to related things and
organizations (Rozhkova, Blinova and Rozhkova, 2017). This accounting procedure
for costing sees the association between costs, different expenses activities and
manufactured items, sharing out underhanded costs to items less valuable than
regular costing strategies. In any case, some variant expenses, for instance, the
administrators and office staff pay, are difficult to give out for each product
manufactured. Through this instrument organization isolate all the exercises or
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procedure on costing bases. It takes less costing activity on the top and high
costing activity on bottom to focus on each activity separately.
Solution to financial problem: Activity based accounting helps management in
solving financial problems such as priority based accounting and preferential
accounting of different valued based product.
Comparison: This tool is useful for all type of organizations, especially
organizations doing assembly of parts. Manufacturing organizations use this
method to know which production unit is their core inventory, on the other hand
service sectors uses this method to identify their core selling products cost.
4. Controlling and reporting: It is the main duty of financial accountant to analyze
various statements such as income statement, balance sheet and ratio analyses
before preparing report because strategic decisions will be take on the basis of
managerial report (Sands, Lee and Fonseka, 2016). Controlling costs and other
factors to maintain authenticity of report is also necessary for junior accountants.
Actual or real cost analyses important for right decisions.
Solution to financial problem: Management accounting solves financial problems
in following way:
 It helps in developing a strong relationship between company’s strategies
and firm’s important decisions.
 It ensures whether the ethical value of business is followed properly, code
of conduct is suitable for employees.
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 Promote leadership among employees, also help managers in controlling
employees through performance analysis.
Comparison: This planning tool is equally important for all types of
organizations; through regular reporting manufacturing organizations gets
information’s which costs it should reduce to decrease price, on the other hand,
service organizations applies this tools to know which branching is performing
well and which is not and it controls their costs accordingly.
5. Performance evaluation system: A performance evaluation system is an efficient
method to get information about how well an employee is performing their tasks.
Through this system management can evaluate or valued the efforts of the
employees in their work. Also it can remove wastage of time or resources at work.
Solution to financial problems: There are four reasons why a precise performance
evaluation system ought to be executed for solving financial problems
 This process motivates positive performance and attitude.
 It satisfies employee’s curiosity and queries about how well they are
performing in their job.
 It is an employee developing tool.
 It provides a base for taking legal disciplinary actions, promotion
related decisions, and counseling for underperforming employees
and highlighting best employee’s to set a benchmark for other
workers.
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Comparison: This planning tool is mostly applied by service sectors especially
digital marketing organizations to evaluate whether their marketing team
achieves assigned target or not.
M4. Sustainable success through solving financial problems by
Management Accounting:
Sustainable success: It means a success which stays for a longer period of time.
In this changing world the concept sustainable success seems to be difficult.
Through solving financial issues, company can achieve sustainable success in
following ways:
 Recognize the social and natural patterns which will affect on the
association's capacity to fabricate an incentive.
 Produce reports which remember data for maintainability impacts to
advise evaluating and planning choices, vital arranging and speculation
examinations.
 Build up KPIs which bolster reasonable and vital objectives.
 Enjoying supportable corporate difficulties to the system of the
organization, execution viewpoint, and plan of action and permit to work.
 Apply devices and strategies of the executives bookkeeping like common
asset accessibility situation arranging, carbon foot-printing and lifecycle
costing to help consolidate supportability issues into the procedure of
dynamic.
 Portray the effect of the manageability issues in solid business terms
containing how and when they would influence the organization.
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 Build up the announcing procedure which joins supportability matters to
guaranteeing that applicable non-money related and budgetary data is
uncovered.
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CONCLUSION:
An association having a privilege administrative bookkeeping framework is significant as
picking the correct executive for any organization. As the administrative bookkeeping
framework is would have liked to offer administration with solid and precise data,
chairmen need to ensure that the correct structure for their model of business is picked
for usage. The administration bookkeeping study helps understudies clearly show;
teachers can't maintain any blooper. The primary explanation is that bookkeeping is
viewed as the foundation of every business and along these lines needs exactness.
Giving reasonable diagram and tables of money related bookkeeping is the basic issue
which bookkeeping understudy experience recorded as a hard copy a task. The
motivation behind why people require the board bookkeeping study help. Bookkeeping
is a justifiable yet pragmatic control which subtleties the exchanges of account
identifying with associations or business. The understudies need to look at a great many
exchanges which an organization can perform all through a particular time range. It gets
hard for them to amass that information and coordinate them.
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REFERENCES
Books and Journals:
Agrawal, A. and Cooper, T., 2017. Corporate governance consequences of accounting scandals:
Evidence from top management, CFO and auditor turnover. Quarterly Journal of
Finance. 7(01). p.1650014.
Alam, M., 2017. Management accounting, control and microfinance operation—three papers.
(Doctoral dissertation, University of Glasgow).
Appelbaum, D. and et.al., 2017. Impact of business analytics and enterprise systems on
managerial accounting. International Journal of Accounting Information Systems. 25.
pp.29-44.
Francioli, F. and Quagli, A., 2016. Management accounting change in a manufacturing company
(1946-1975). Performance Measurement and Management Control: Contemporary
Issues, Studies in Managerial and Financial Accounting. Emerald Group Publishing
Limited. pp.165-190.
Georgantopoulos, A. G., Poutos, E. I. and Eriotis, N., 2018. Recent developments and trends in
accounting information systems. Journal of Accounting, Business and Finance
Research. 3(1). pp.1-9.
Hyndman, N., 2016. Accrual accounting, politicians and the UK—with the benefit of hindsight.
Public Money & Management. 36(7). pp.477-479.
Johanson, D. and Madsen, D. Ø., 2018. A virus perspective on management accounting
innovations. Available at SSRN 3197129.
Lee, K. H. and Herold, D. M., 2018. Cultural Relevance in Environmental and Sustainability
Management Accounting (EMA) in the Asia-Pacific Region: A Link Between Cultural
Values and Accounting Values Towards EMA Values. In Accounting for Sustainability:
Asia Pacific Perspectives. (pp. 11-37). Springer, Cham.
Nishimura, A., 2019. Enterprise Governance and Management Accounting from the Viewpoint
of Feed-Forward Control. In Management, Uncertainty, and Accounting. (pp. 31-50).
Palgrave Macmillan, Singapore.
Oyewo, B. M., 2016. Does a Tutor's Industry Experience Makes the Teaching of Management
Accounting More Effective? Some Evidence from Nigeria. Journal of Accounting,
Finance & Management Strategy. 11(2). pp.17-50.
Rozhkova, N., Blinova, U. and Rozhkova, D., 2017, December. The concept of management
accounting based on the information technologies application. In International
Conference on Information Technology Science. (pp. 89-95). Springer, Cham.
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Sands, J., Lee, K. H. and Fonseka, K. B. M., 2016. Advancing sustainability management
accounting in the Asia Pacific region. Accounting Research Journal.
Online
Planning Tools. 2020. [Online]. Available
through:<https://www.academia.edu/33008080/>
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