P1: Management accounting along with its essential requirements

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
P1: Management accounting along with its essential requirements............................................1
P2: Different methods for management accounting reporting....................................................3
M1 Benefits of management accounting system.........................................................................4
D1 Management accounting system and reporting integrated with each other...........................5
TASK 2............................................................................................................................................6
P3: Different costing methods.....................................................................................................6
M2. Management accounting techniques for preparation of financial reporting documents......9
D2. Interpretation of income statements......................................................................................9
TASK 3..........................................................................................................................................10
P4. Advantages and disadvantages of planning tools used for budgetary control:....................10
M3. Uses of various planning tools and their application for preparing and estimating budgets:
....................................................................................................................................................11
TASK 4..........................................................................................................................................12
P5. Adoption of management accounting system to respond the financial problems:..............12
M4. Responding to financial problems, management accounting to sustainable success:........14
D3 Planning tools for accounting period to respond financial problems appropriately:...........14
CONCLUSION..............................................................................................................................14

INTRODUCTION
In any business organisation, there is a requirement to implement a management
accounting system which helps the company in managing its operations effectively and
efficiently. It is also know as cost accounting which assist the company in identifying,
measuring, analysing, interpreting and communicating information to mangers for achieving an
entity's goals. For better understanding of management accounting, company named NERO
LTD is chosen which is operated in manufacturing sector. This report divides in four tasks, first
task explains the term management accounting system and describe its essential types. Second
task describes uses of various appropriate cost accounting techniques for preparation of income
statement. Third task describes the various planning tools used in cost accounting system and its
advantages and disadvantages whereas fourth task provides the comparison between
organisations in adoption of this system and their responses to various financial problems.
P1: Management accounting along with its essential requirements
Management accounting relates with the internal management which considered non-
monetary as well as monetary information that helps to take an effective decision for the
organisation. It plays an crucial by making effective plans that increases the productivity of the
organisation. In these some of effective management accounting system that executed by Nero
Limited as follow:
Cost accounting system- The cost accounting system is implemented by Nero limited to
monitor the cost that is incurred while performing their daily activities. For this they record the
revenue, profits and cost that is record and manage by the organisation. In most of the
organisation finance department adopted this method because it refines the data and turn it into
meaningful information. Like the production cost measures the profitability of the organisation

through recording the data that is managed by them. In context of Nero limited this helps an
organisation to find the production and service cost of the organisation.
Price optimization system- This system helps an organisation to determine the cost or
price of products or services that is offer by them in the market to their customers. Price
optimization system is beneficial for Nero limited because it helps them to ensure the future
profitability for an organisation. Most of the organisation adopt this method for decide the price
of their products that is accepted by its stakeholders such as customer and employees. Along
with this it also helps them to achieve their objective effectively.
Job costing system- This accounting system plays an crucial role in the organisation as it
identify the cost of each unit on individual bases. Job order costing system provide more benefits
to those organisation which provides large number of products to their customers. In the context
of Nero limited finance manager measure or evaluate the cost that is earned by them from each
unit by making the estimation for different cost. Along with this it is also essential for the
organisation to measure their cost for each product or unit which helps them to add the margin
which is useful for organisation to complete their goals with approaching them through positive
forces.
Inventory management system:This system refer to the process that helps an
organisation to complete their goals with maintaining proper inventory. Moreover inventory
management system helps them to monitor regular and current stock that is required by them to
complete their daily activities. It determines that inventory plays an crucial role in the
organisation because mismanagement of inventory creates problems for organisation by
increasing their cost and waste of raw materials. Like Nero limited executed this system in order
to provide fast services to their customers. Along with this it also helps them to gain competitive
edge from their rivals.
Particular Financial accounting Management accounting
Definition Financial accounting refers to that
accounting system which prepare
the financial accounts or statement
for an organisation. The major of
this is to provide essential
Management accounting system
provides relevant information in all
departments of the organisation. It
helps them to develop effective
plans and policy for the

information to interested parties
such as investor, employees etc.
organisation.
Purpose Financial accounts are prepared to
maintain the records of monetary
transaction to evaluate the profits
of organisation.
The major purpose of this is to
gather all the essential information
that is require by the organisation.
Information Financial accounting provides only
monetary information that take
place in the organisation.
Management accounting provides
monetary as well as non- monetary
information to the organisation.
Objective They collect and deliver only
financial information to the
customers or outsiders.
Management accounting assist
management to plan and develop
effective decision making process.
P2: Different methods for management accounting reporting
Budget report- The budget report play an important role in the organisation that helps
them to recognize the difference between their actual cost and the estimated cost that take place
during their operations. Within circumstances of Nero limited it is mandatory to formulate the
budget in order to get the information about their economic condition. In result for this an
organisation recognises their cost level, expenditure level and others factors so it is easy for them
to take effective decisions. In this report the reason behind the fluctuation between their
estimated and actual budget are identify by an organisation. Along with this it also helps them to
control their transaction that creates an unnecessary burden on the organisation through
increasing their expenses.
Account receivable report- The main function of account receivable report is to identify
the number of debtors and creditors that are present in the organisation. In context of Nero
limited it helps them they find out number of debtors so it is easy for them to recover the amount
by formulating new strategies that help to increase their profits. Moreover it is also useful to
make policies by which they reduce the number of creditors as account receivable report helps
them to identify the number of bad-debtors that are present in the organisation. So they are able
to make strict policies for them.

Cost managerial accounting reporting- In this report all the business activities that
impacts on cost of the organisation are included in cost accounting report. Nero limited
formulate this report because it helps them to identify the cost that is impacted in the
organisation. It helps them to identify the difference between the expenses and the income that is
generated by the organisation through selling different products and services in the market.
Moreover it also helps them to reduce their nu-necessary expenses so there is increase in the
profits of the organisation. Further it is essential for organisation to identify cost managerial
aspect because it impact on overall performance of the organisation.
Performance report- Nero limited formulate performance report for their organisation in
order to measure and evaluate the performance of each employee and organisation. The main
purpose of this report is to identify the current performance of the organisation that assist them to
identify different issue that are faced by the organisation to complete their task. Along with this
it is useful for achieving their mission through making effective strategy that is useful from
overcoming different issue. As it helps them to take right decisions to enhance the profitability of
their overall performance.
M1 Benefits of management accounting system
Management accounting system Benefits
Price optimisation system  It is easy for the organisation to decide
the effective price for products that
helps them to attract more customers.
 The another benefit of price
optimisation system is that an
organisation decide the price of their
product that increases sale of it.
Cost accounting system  This system helps the organisation to
calculate their total cost so it is easy for
them to decide the margin that increases
their profits.
 The other benefit of cost system it is

beneficial for organisation to identify
those goals that help to calculate their
cost.
Inventory management system  In this an organisation identify different
needs that is required by customers so
they order essential amount of
inventories to fulfil their needs. This
help them to gain loyal customers for
the organisation.
 It is useful because it helps them to
complete their goals by determining
different factors like they attain their
goals by managing their inventory with
formulating effective strategy.
Job costing system  This system helps an organisation to
identify those goals which exist in
market and helps an organisation to
complete their goals with adding their
margin.
 Another benefits is that it helps an
organisation to keep the track of their
teams and individuals that impact on
the cost control, efficiency which help
to track their regular performance.
D1 Management accounting system and reporting integrated with each other
Both concepts management accounting as well as management reporting both are
integrated with each other because they work for achieving common objective. They both helps
an organisation to achieve their goal within minimum time period. In order to easily understand
an example is mention. It helps them to monitor and control the activities that relates with the

inventory management. Like it helps them to identify that more stock is required by organisation
to identify the required budget. The other example is that to identify those goals that assist an
manager to evaluate their total cost that help to execute their cost effectively in industry. This
conditions are possible only for the organisation when they develop effective budget for the
organisation. As this prices are based on the estimation that are raised in the market or industry.
Therefore management accounting is essential for them because it helps them to complete their
goals with efficiency by keeping regular monitoring on their activities.
TASK 2
P3: Different costing methods
Marginal costing method- This is a kind of method which is related to the preparation
of income statements. In this technique, fixed and variable both the costs are considered
differently. The fixed cost is taken as the cost of period while the variable cost is considered as
the cost of unit.
Absorption costing method- It is a type of costing technique in which fixed and variable costs
are considered in an equal manner. Under this, the fixed cost is taken as the cost of unit same as
variable cost is also considered as the unit cost.
Income statement under absorption costing method for month of May & June
Particulars May June
(in £) (in £)
Total sales 50 15000 25000
Less: Cost of Goods sold
Opening stock
D.L. 5 2500 1900
D.M. 8 4000 3040
Variable production cost 3 1500 1140
Fixed indirect production expenditure 4000 4000
Closing stock -4800 2122.4
Total cost of goods sell 7200 7957.6

G.P. (Gross profit) 7800 17042.4
Selling & Distribution expenses 4000 4000
Administrative cost 2000 2000
Sales commission expenditure 750 1250
N.P. (Net profit) 1050 9792.4
Absorption Cost per unit
Direct labour cost per unit 5 5
Direct material cost per unit 8 8
Variable cost per unit 3 3
Fixed indirect production expenses per unit 8 10.53
Total Absorption Cost per unit 24 26.53
May June
Opening stock - 200
Units produced 500 380
Sold units 300 500
Closing stock 200 80
Income statement under Marginal costing method for month of May & June
Particular May June
(in £) (in £)
Total Sales 50 15000 25000
Less: variable cost
Opening stock - 3200
D.L. 5 2500 1900
D.M. 8 4000 3040
Variable Cost 3 1500 1140

Less: Closing stock -3200 -1280
Total Variable cost 4800 8000
Contribution 10200 17000
Fixed indirect production cost 4000 4000
Selling & Distribution costs 4000 4000
Administrative costs 2000 2000
Sales commission cost 750 1250
N.P. (Net profit) -550 5750
Absorption Cost per unit
Direct Labour cost per unit 5 5
Direct Material cost per unit 8 8
Variable cost per unit 3 3
Marginal Cost per unit 16 16
May June
Opening stock - 200
Produced units 500 380
Sold Units 300 500
Closing stock 200 80
Calculation of material cost variances
As per the given data, three types of material variances calculated which are as follows-
 MCV(Material cost variance) = Standard material cost (SMC) – Actual material cost
(AMC)
 MPV (Material price variance) = (Standard price – Actual price) X actual quantity
purchased and used
 MUV (Material usage variance) = (Standard quantity – Actual quantity) X standard price
As per given data,
Standard Price = £10 per kg

Actual Price = 20900/2200 = £9.5 per kg
Actual quantity = 2200kg
Standard Quantity = 1000kg
MPV = (10-9.5)X2200= £1100 (F)
MUV = (1000-2200)X10 = £ 12000 (A)
MCV = (10X1000)-(2200X9.5) = £10900 (A)
Calculation of closing inventory of material using LIFO and Weighted average method:
Under LIFO(last in first out) method:
Date Purchased Issued Closing stock
Units Units
(in £)
Total
(in £)
Units Units
(in £)
Total(in
£)
Units units(in
£)
Total(in
£)
01/05/1
9
40 3 120
12/05/1
9
20 3.6 72 - - - 40
20
3
3.6
120
72
15/05/1
9
20
16
3.6
3
72
48
24 3 72
20/05/1
9
20 3.75 75 - - - 24
20
3
3.75
72
75
23/05/1
9
- - - 10 3.75 37.5 24
10
3
3.75
72
37.5
27/05/1
9
- - - 10
15
3.75
3
37.5
45
9 3 27
30/05/1
9
- - - 5 3 15 4 3 12
Under Weighted Average method:

Date Purchased Issued Closing stock
Units units(in
£)
Total(in
£)
Units units(in
£)
Total(in
£)
Units units(in
£)
Total(in
£)
01/05/1
9
40 3 120
12/05/1
9
20 3.6 72 - - - 60 3.2 192
15/05/1
9
36 3.2 115.2 24 3.2 76.8
20/05/1
9
20 3.75 75 - - - 44 3.34 147
23/05/1
9
- - - 10 3.34 33.4 34 3.34 113.56
27/05/1
9
- - - 25 3.34 83.5 9 3.34 30.06
30/05/1 - - - 5 3.34 16.7 4 3.34 13.3
M2. Management accounting techniques for preparation of financial reporting documents.
In management accounting system, the marginal and absorption both techniques may be
used by the company in preparation of financial reporting documents. After evaluating the above
problems, it can be said that marginal costing technique is best as compared to absorption
technique.
D2. Interpretation of income statements.
As per the above mentioned income statements it can be interpreted that in the absorption
costing method, company is earning the net profit of £ 1050 in May month. As well as in the
June, they are earning the profit of £ 9792.4 which is more then previous month. On the other
hand, in the absorption costing method, they are getting the net loss of £550 in May month and in
next month they are earning net profit of £5750.

TASK 3
P4. Advantages and disadvantages of planning tools used for budgetary control:
Budgeting: It is a financial plan of revenue and expenses over a specific time of period.
It is continuous process of estimation of future amount in a financial year. This tool helps in
planning of the estimate data related to future expenses and income of an organisation. There are
various type of budget that helps to plan the business operating activities like flexible budget, fix
budget, master budget, zero- based budget.
Budgetary control: It is a internal planning of operational activities of an organisation. It
refers to how well management utilize budgeting process to evaluate and control the business
operation in a specific period of time. This budgeting process help to internal stockholder to
compare actual result with standard data. It help in better planning as per objectives and goal of
an organisation. Nero. Ltd makes this budget planning in order to know the actual performance
of the business and set targets and evaluate the variances between them.
There are different planning tools that can be used by Nero in order to increase the
efficiency of the organisation. These tools may support to business to perform their day to day
business process. It may have some benefit along with limitation. Some of the planning tools are
described as under with their advantage and disadvantage:
Operational Budget: It consists of all income and expenditure over a specific time of
period of an organisation. This budget is prepared in reporting to management in basis of
controlling the day to day business activities related to direct sales, indirect expenses. Nero Ltd is
using this tool to handle the operating process of the business.
Advantages:
Management of Nero Ltd can manage the daily expenses and income like wages, sales
value. It helps to management in comparison of the current income and expenses with that of
previous year.
Disadvantage:
It is time consuming process for the poor managed company. Budgeted data are nor
reliable every time in the business. So it required to predetermine business resource planning.
Cash Budget: It is detailed perdition cash flow for a particular time period of an
organisation. This budget is used to ascertain an organisation has sufficient cash to operate the

business activities. This budget shows cash inflow and cash outflow summery to management of
Nero Ltd so that they can predict the production of desire sales unit.
Advantage:
Cash budget helps to improve the efficiency to managing the short term financial
resources. Nero Ltd is made this budget in order to know actual cash flow so they can be rapidly
identified potential deficiency of the organisation.
Disadvantage:
Cash budget can bound the spending power of the Nero Ltd by optimum utilisation of
available resources. It does not shows the profit of the business.
Flexible Budget: This budget modify with changes in production level. This budget
reflect that any changes in the activity volume must be included in the projection budget. This
budget determines the volume at different level of activity in production, sales, direct material
and overhead. Nero Ltd implement this budget to know the changes made at various level in
term of production and sales level.
Advantage:
This budget can be adopt the changes at certain level as per requirement of the Nero. Ltd
It enables to show the productivity at various level of production. It provide more accurate
assessment of organisational and management efficiency.
Disadvantage:
This budget is rely on assumption of continuity of production level of Nero. Ltd that may
not be same in future, vary on demand of the clients.
M3. Uses of various planning tools and their application for preparing and estimating budgets:
Application of analytical planning tool by forecasting of the budget may enhance the
productivity and effectiveness of an organisation by improvement in abilities of the employees.
Application of these planning tools by considering standard data can change the management
roles in terms of their effective strategies regarding the future events. These budget are used in
well planning and analysing the operating business activities. Application of these planning tool
can be in estimating budgetary control and better management planning process so final
management reporting can be reliable to the organisation. Nero Ltd is using the budgetary
control planning to analysis the management tool and their application in the organisation for
example cash budget is prepare for know liquidity position and cash availability at certain

situation. So these tools can be adopt as per requirement of the organisation. Nero. Ltd is applied
these budget in order to operate the business activities in efficient way.
TASK 4
P5. Adoption of management accounting system to respond the financial problems:
In the competitive world, every organisation may faces some particular financial
difficulties that are required to be address in some possible manor of basic of accounting
concepts and principle. Each of the organisation in the industry requires financial stability to
operating the financial activities to survive in the long run in order to face various financial
challenges in opposition market. Improper management of cash and credit may occur financial
interruption in the business. At this moment Nero Ltd is facing financial difficulties that effects
its production level and actual output of firm.
The following are the main difficulties related to business problems that are faces by Nero Ltd:
Late payment by customers: Some of the clients of goods of Nero Ltd is paying the
amount when the credit limit time is over. This problem is arises when customer is not paying
their outstanding, it may occur unavailability of fund or short fund. Nero Ltd is production based
organisation that requires adequate fund in order to pay their indirect expenses. This hindrance
can be solved by limit the credit period of amount of debtors.
Fund management system: To perform the business operating activities it needs to
understand the cash requirement in the organisation. Nero Ltd is not able to manage properly the
money resources so their financial activities may effected from it. Management looks to situation
to monitor the cash flow system by tighten the credit policy and preventing from sudden
expenses. So they require to apply the management accounting tools like cash flow statement,
Expenditure planning to handle these issue.
The manager of Nero Ltd are need to apply these specific techniques to acknowledge financial
problem. These tools are as follows:
Benchmarking: This tools measures the overall performance of organisation' goods and
services against that of other business. It is continuous process of measurement of actual
business activities with standard data. Nero Ltd needs to set standards for itself and evaluate their
activity and performance against best practice of business or well recognised industry leader.
This process refers to related cost efficiency, quality standard, time management and other

specific dimension. So organisation can improve their effectiveness in term of adding more
function, business process to its organisation system. With help of benchmarking Nero Ltd
identifies that customer are not paying their amount as per credit policy.
Key performance indicator: It is measurement tools of business activities and process
that indicates the progress of the business. These are matrices that used to analyse the business
defined objects. High level KPI may focus on the overall performance of the organisation and
address the right path towards the strategies goal of the business. Nero Ltd needs to apply this
tools in term of line up the business activities and financial difficulties. It states the well defined
and accomplishing the business goal by research-practice on related KPI's . With the help of this
tool Nero Ltd identified the mismanagement of cash within organisation.
Financial Governance: It consists of collecting , monitoring the financial business
activities of an organisation. It shows how a company track business activities, financial
transaction, control data, compliance of the business. Nero Ltd resolve these business problem by
tighten the credit policies, making the cash budget. So they can able to operate the business
effectivly.
Comparison between Nero Ltd and Cambridge manufacturing Ltd
Nero Ltd. Cambridge manufacturing Ltd
Nero Ltd is facing the challenges regarding
liquidity inefficiency due to unorganized
management of the company, it requires to
manage the thing properly related to sudden
expenses and credit policy of the organisation.
Cambridge manufacturing Ltd is facing hurdle
regarding the extravagant cost of manufacture
in production unit. It requirement to control the
fix cost so they can increase the profitability in
the desire sales volume.
It is suggested to Nero Ltd to use the cost
accounting method to resolve these type of
hurdles. With this method company can more
effective by cut the cost of manufacturing by
keep tracking record of operation on daily
basis.
Price optimisation strategies must be
implement by the management to prevent the
excessive cost of indirect expenses in the
production of goods. So company is able to
earn more profit with less manufacturing cost
of production.

M4. Responding to financial problems, management accounting to sustainable success:
To achievement of the financial goal of the business organisation of any manufacturing
unit, It is requires to address the various factor related to financial and operational activities in
order respond the business objective in the long run. Some of the industry used these accounting
tool like cost accounting system to respond the financial hurdle regarding ineffectiveness of
production cost, variable cost, other expenditure. These tools are also help in improper
management of short term fund like cash and cash equivalent. So these are the basic techniques
which needs to be include management accounting to handle the financial problem.
D3 Planning tools for accounting period to respond financial problems appropriately:
These Planning tools are work as support system to management for smoothly function
the business practices to reduce the organisational difficulty related to financial and cost
accounting issues. For example master budget may be used by the Nero Ltd to assessing the
overall internal environment that helps to the management to take reliable decisions. These types
of planning tools gives a great support to management in order to evaluate the financial plan and
detect production related issue or any type of departmental hurdles to provide the appropriate
solution.
CONCLUSION
By combing all the factors from the above report it is concluded that management
accounting is beneficial for organisation because it helps them to make suitable decision for the
organisation. The decision that are related with finance are crucial therefore it is important for
them to cover all aspects that is performed by the organisation to enhance their profitability. For
this, different accounting systems such as cost accounting system, price optimisation system etc.
are required to use along with the reports such as inventory management report etc. Alongside, it
also required to use different planning tools such as KPI, Benchmarking etc. in order to avoid
organisation to face any financial issues.