Management Accounting Techniques and Practices

The assignment delves into the world of management accounting, examining different techniques like Activity Based Budgeting (ABB), Zero-Based Budgeting (ZBB), and their influence on firm performance. It analyzes the relationship between strategic management accounting practices and organizational success. The document also discusses cost accounting systems, inventory management, job costing, and price optimization strategies, providing practical examples and insights into their application.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Management accounting and essential requirement of its types............................................1
P2 Types of management accounting report...............................................................................3
M1 Application of management accounting on Airdri along with its benefits...........................5
D1 Integration of management accounting system.....................................................................6
TASK 2............................................................................................................................................6
P.3 Calculations for various costing techniques for Airdri.........................................................6
M2 essential requirement of management accounting technique in financial reporting............9
D2. Providing necessary information to general manager..........................................................9
TASK 3..........................................................................................................................................10
P4 Advantages and disadvantages of planning tools used for budgetary control.....................10
M3 Planning tools for forecasting of budgets...........................................................................13
D2. Evaluating how planning tools can help in resolving problems.........................................13
TASK 4..........................................................................................................................................13
P5. Explaining how management accounting system helps in responding to problems...........13
M4. Analysing response of financial problems in the sustainable success of organisation......14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting also known as managerial accounting provides aid to the
decision making of management by analysing costs and operations of business and preparing
internal financial records, reports and accounts. This system facilitates financial accounting and
financial statement preparation. The main purpose of management accounting is to provide
relevant data to the internal users like management which will enable them in taking future
economic decisions regarding sales, revenue, cost, expenditure, expansion of business, etc. In the
present report various tools and techniques of management accounting has been used along with
the use of those tools and techniques. For the better understanding of this research report,
discussion is based on a small business organisation i.e. Airdri that is based on UK. Various
information is provided to the general manger of Airdri regarding management accounting, its
types, reports under management accounting etc. Further for organisation, income statement has
been prepared with two of the management accounting techniques that is marginal costing and
absorption costing along with explaining difference among two. Different budgets that are used
in management accounting are also provided below.
TASK 1
An Organisation to get success and to get favourable growth in world of competition
need to analyse its internal strength. Therefore, management accounting is a technique that
enables managers and small business owners to take economic future decisions along with
identifying favourable solutions to the business problems (AbRahman and et.al., 2016). It also
helps in improving the efficiency of business operations by using some tools like budgets, costs,
revenue, etc.
P1 Management accounting and essential requirement of its types
There are different types of management accounting system that can help Airdri in taking
informed decisions by providing the management accurate and timely information such as cost
cutting, increasing time of production, preparation of budgets etc. This system will also be
fruitful for Airdri for adequate allocation of funds in activities like material purchase along with
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identifying areas where company will be able to cut down its expenses and costs. Before
understanding the essential requirement of types of management accounting system, knowing its
types is important. Below diagram clearly exhibits some types of management accounting.
Management Accounting
System
Cost accounting system: This system helps organisation in determining the costs of their
products and services along with cost control, inventory valuation and profitability analysis
(Bertz and Quinn, 2014). It would be beneficial for Airdri to estimate cost of its products
accurately for identifying profitable operations. It is essential for organisations to know which
products are profitable for their business and which are not, this can be done only with cost
accounting system of management accounting.
Inventory management system: Every business unit has number inventories as stock.
Managing these inventories is essential in order to identify the actual inventory rotation in the
business. Being a retail store, it is more necessary for Airdri to maintain and manage its
inventory. However, many software’s are available in the market that have done easy to manage
inventory. But the company can also use tradition inventory management methods like LIFO or
FIFO method. This system includes supervision of both, capital assets and stock of organisation.
Thus, this will help Airdri in determining any dead stock in the organisation along with those
inventory that has the highest rotation.
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Cost accounting system
Inventory
management system
Job Costing System
Price Optimising
System

Job Costing system: This method of management accounting system helps in assigning
manufacturing cost to different products of the company. This method id applied when there is a
significant difference among products (Bryer, 2013). However, in case of identical products,
process costing system is used. With the use of this system, management of Airdri would be able
to accumulate cost of labour and overheads to different jobs which ultimately will help in
identifying areas where cost can be reduced.
Price Optimising system: This system of management accounting by using
mathematical analysis determines the response of customers at different price levels of its
products and services. This system will also help Airdri in identifying the best price of its
products that would help in meeting its business objectives like profit maximisation. This system
works using data like inventories, historic prices, operating costs and sales volume.
All the above explained system of management accounting will ultimately benefit Airdri
in making future economic decisions and achieving its business goals and objectives along with
increasing the performance of business.
P2 Types of management accounting report
Management accounting is all about providing information to management that to
facilitate decision making. Therefore, to provide information that is necessary for decision
making management accounting reports is used. Different reports provide different information
to its users. Thus, it would be feasible for management Airdri to make favourable decisions using
these reports. The main reason behind the preparation of these reports is identification of
loopholes in the business operations (Chan, 2015). However, no fixed time period is there for the
preparation of these report, these are made as per the needs and requirements of managerial
information. Below diagram exhibits few of such reports.
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Drawing 1: types of reports
Source :(Groot and Selto, 2013)
Budget Reports: Budget report will help managers of organisation and small business
owners in analyzing the performance of their business and in big organisations, cost controls and
performance of department is analysed by managers. In prcise terms, this report estimates the
requirement of budget for future expenses and is generally based on the actual expenses of prior
years and forecasting of future expenses. This also helps in trimming the cost in the areas where
it can be done. This report will facilitate Airdri in having estimation of its future expenses so that
provisions can be made earlier. These not just estimate future expenses but also estimate future
sales and purchase volume along with the estimated profits.
Accounts receivable Ageing report: This is a critical report for those organisations who
provide credit to their customers (Groot and Selto, 2013). This is a critical tool that helps in
managing cash flow. Under this report customer balances are segregated on the basis of the
period they have been owed. However, mostly this period is either 30 days, or 60 days or 90
days. With the help of this report management of Airdri can find out loopholes in its collection
process. For, if more of the customers are unable to pay owed amount for more than 90 days, this
means there is a requirement of improvement in the collection process of the company. Regular
preparation of aging report will keep accounts department of Airdri from overlooking of old and
longer debts.
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Job Cost Report: This report helps in showing expenses of a particular job or project.
These expenses of particular project are then matched with the estimated revenue in order to
evaluate the profitability of different projects. This enables company in knowing which projects
are profitable and which are not. Through this report Airdri can identify its high earning areas
and can make decisions accordingly to focus more efforts on profitable areas rather than wasting
resources on non profitable areas (Joshi and Li, 2016). With the help of job costing report,
expenses can be analysed during the progress of project so that areas of wastage can be corrected
before the cots escalate.
Inventory and manufacturing report: This report is generally requires on Airdri where
manufacturing takes place or those where there is physical inventory. By using this report those
organisations can make their manufacturing process more efficient. Main components of this
report are amount of wastage inventory, labour cost per hour or overheads cost per unit. By
analysing and comparing all the assembly lines within a business unit areas for improvement can
be determined along with best performing departments.
M1 Application of management accounting on Airdri along with its benefits
Management accounting has a wide scope, this can be applied within Airdri in the form
of tax accounting, financial accounting, internal auditing, activity management, inventory
management, cost accounting, price optimising system, etc. All these systems will provide
benefits to Airdri in following ways:
Reduction in Expenses: With the help of management accounting system, Airdri will be
enable in reducing its cost and other operational expenses. Cost of economic resources and other
operations can be reviewed.
Improved cash flow: Budgets under management accounting system are important part
of any business (Khodzytska and Ivchenko, 2014). With the use of budgets, Airdri can have a
financial road map for its future business expenses.
Business decisions: Management accounting system by providing information facilitates
managers in taking decisions for future like business expansion, etc. management accounting
will provide Airdri quantitative information that will enable in better decision making.
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Increase financial returns: With all above benefits, the performance of business and its
financial returns also increases.
D1 Integration of management accounting system
Managerial accounting provides quantitative as well as qualitative information to the
management of organisation for better decision making process (Klemstine and Maher, 2014).
Hence, management accounting information can be integrated in Airdri by the use of its owners,
managers and employees, by planning and controlling of business activities, cash management
and continuous improvement and decision making process. With the constant measurement and
improvement in the various processes of business, techniques of management accounting will be
beneficial and can be integrated within the organisation.
TASK 2
P.3 Calculations for various costing techniques for Airdri
For the purpose of calculation and preparation of income statement, professionals of
Airdri can use two techniques i.e. absorption costing technique and marginal costing techniques.
Both the methods differ from each other because marginal costing technique takes into account
only variable expenses while absorption costing technique takes into account all the expenses
including fixed and variable. Hence, it will be beneficial in analysing the profitability and
revenue earnings of the firm. Thus, in the tables listed below will describe marginal and
absorption costing methods which will reflect lights on the profit gathering of Airdri such as:
Income statement of Airdri on the basis of
Marginal costing
PARTICULARS
Details Amount
(£)
Amount
(£)
Sale revenue on production 600*35 2100
Cost 700*13 9100
Less: closing stock 100*13 1300
variable cost 7800
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Contribution per unit 13200
less: variable overheads on sales 600*1 600
less: fixed cost
production overheads 2000
selling fixed cost 600
administrative fixed cost 700 3900
Net Profit 9300
Interpretation: By considering the above listed table it can be said that the firm has the
valuable profitability which is on the basis of Marginal cost method. Hence, these costing
technique will be calculated at the 600 units of production out of which 500 were sold so 600
units will be multiplied with the selling coat of £35. Thus, the revenue will be gathered by the
firm is for £2100. The cost over producing such articles will be calculated as 700 of the units will
be multiplied with the direct materiel labour and the variable cost of product which together
produces the rate of £13. Hence, the overall cost of production is £9100 and after making the
sales of such products the remaining cl. Stock was of 100 units which were amounted on the
basis of production cost that is £13 and will be deducted from the cost of production. Thus,Airdri
has acquired contribution or the gross profit for £13200. There will be deduction of the various
operational expense such as variable overheads fixed expense, production overheads, fixed
expense over selling and administration amounted at £3900. Thus, the net profit acquired by the
organisation is for £9300.
Income statement of Airdri on the basis of
Absorption costing
PARTICULARS
Details Amount
(£)
Amount
(£)
Sale revenue on production 600*35 2100
Cost 700*16 11200
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Less: closing stock 100*16 -1600
Less: fixed production overheads -100
Cost of production 9500
contribution per unit 11500
less: variable overheads on sales 600*1 600
less: fixed cost
selling fixed cost 600
administrative fixed cost 700 1900
Net profit 9600
Interpretation: In accordance with the table listed above which presents the income
statement of Airdri on the basis of absorption costing techniques. Thus, the revenue gathered by
the organisation is for 600 units at selling cost of £35 per unit which produces the revenue of
£2100. Hence, for the further calculation these techniques involves the fixed production
overheads before the gross profit is for 100 and the cost of production will be measured at the
selling price of £16 which is the total production amount will be divided by the units of
production that presents the rate of £35 per unit. Hence, production cost will be measured by
adding direct material, variable cost of the production and the production rate. Thus, cost was
measured at £11200 and the closing stock of the firm will be measure on the remaining 100 units
at 16 per unit. Hence, such deduction brings gross profit or contribution for Airdri for £11500.
However, there will be deductions of operational expense for £1900 as well as it brings the net
profit for £9600.
Difference between absorption costing and marginal costing
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M2 essential requirement of management accounting technique in financial reporting
Management accounting tools and techniques like marginal costing, absorption costing etc.
helps in providing financial information that can be used in making financial statements of an
organisation. Management accounting is a part of financial accounting (McLellan and Sherine,
2013). As discussed above uses and benefits of management accounting to an organisation,
financial accounting would not provide relevant data without the use of management accounting.
It is an initial step that determines costs and expenses of different projects or jobs and also
forecast future expenses which in turn provide information that is useful in preparation financial
statements. It also provides techniques of preparing income statement and with the analysis of
results of those techniques the best method of preparing income statement can be opted by
Airdri.
D2. Providing necessary information to general manager
To: General Manager
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(Airdri store)
From: Management accountant
(Airdri store)
Subject: Information regarding revenues from different techniques
Dear sir,
It is to provide you information that has been assessed by preparing income statement
with marginal costing system and absorption costing system. Preparation of income statement
has been completed. However, there is not much difference between the results of net profit of
both the techniques. But, income statement using absorption costing shows net profit with
£300 more than the income statement prepared by using marginal costing. Therefore, it would
be beneficial for Airdri to use absorption coasting technique because with this better
performance of the company can be shown to its stakeholders.
Thanks and Regards
TASK 3
P4 Advantages and disadvantages of planning tools used for budgetary control
With the use of planning and budgetary control tools will help Airdri in determining
required and adequate information about the firm (UK HR SUPPORT ASSISTANT, 2017). These
techniques include various budgets which will help organisation in strengthening its internal
operations which will enable the company in meeting its future obstacles and problems in the
areas like, production, sales, cash flow, etc. every organisation have different benefits along with
various loopholes which are mostly undermined, these planning and budgetary control tools not
only helps in determining these loopholes but also provides solution to them (Nørrekli, 2014).
Below are some budgeting tools along with their benefits and disadvantages.
Sales Budget: Preparation of sales budget will help Airdri in determining the expected
number of sales in near future along with the expected per unit price of products. By estimating
future sales and per unit price company can make decisions accordingly. For example if it has
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been estimated that future sales are declining, company by reducing its profits or sales price can
or by advertising can attract more customers (Novas, Alves and Sousa, 2015).
Drawing 2: Examples of sales budget
Source :(Nørrekli, 2014)
Advantages of sales budget:
This budget is helpful in planning for sales to achieve expected or targeted future sales.
This is also useful in allocation of resources which in turn helps in forecasting of sales. It also
keeps expenditure in control to achieve expected and to improve future profits. It also helps in
revealing areas where company need to strengthen its position.
Disadvantages of sales budget:
It has an inherent limitation of ineffective forecasting of future events. It is not necessary
that each key personnel of the organisation will accept this. It ignores those expenditures that can
provide long term returns to the company.
Cash Budget: This budget helps in estimating future cash inflows and cash outflows of
an organisation over a specific period. This also helps in assessing whether the business has
sufficient cash resources in order to meet future requirements. With the use cash budget, Airdri
will be able to maintain necessary cash for future requirements and also can control excess cash
outflow from the business.
Advantages of Cash budget:
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Using cash budget enables management in focusing on material areas that includes high
amount of cash requirement. This will also help Airdri in determining te required amount for
fulfilling future short term obligations. Cash budget will enable in identifying the extent of credit
sales.
Disadvantages of cash budget:
Many times cash budget can cause distortion. It is not necessary that estimates using cash
budget are proper. There is always an area of doubt and unreliability. These budgets can be
easily manipulated.
Activity based Budget: This method helps in providing greater transparency to the
process of budget making. It is the method that allocates revenues generated directly to those
units responsible for the revenue (Activity Based Budgeting, 2017). It is the planning system
where cost associated with the activities and budgeted expenditure is compiled with expected
level of activity. In order to derive the annual budget, existing cost levels are adjusted with the
changes in revenue and inflation.
Advantages of activity based budgeting:
It provides more accurate costing of products, services and distribution channels. Activity
based budgeting is easy to understand by everyone. It also supports, score card and performance
management.
Disadvantages of Activity based budgeting:
Implementation of activity based budgeting requires substantial resources there, it is hard
for small businesses like Airdri to implement this system in their organisation. Reports of this
system are not based on GAAP (Generally Accepted Accounting Principles). It requires a lot of
care as the data in this system can be easily misinterpreted.
Zero based budgeting: under zero based budgeting budgets are not prepared taking the
basis of past year expenses. Instead, budgets for future expenses are prepared taking zero as a
base. Each expenditure to be covered under this budget need to be justified (Zero-based
Budgeting (ZBB), 2012).
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Advantages of Zero based budgeting:
It is a flexible budget and can be adjusted as per the requirement. It has a more
disciplined execution along with focused operations and lower costs. This system is mostly
useful for service or non profit organisations.
Disadvantages of zero based budgeting:
Zero based budgeting is a time consuming process. It involves more expenditure as the
base is not clear. There can be personal bias and manipulation under this system.
M3 Planning tools for forecasting of budgets
Budgeting or planning tools used by management and professional within the organisation
facilitates forecasting of future transactions like cash inflow and cash outflow, sales volume,
profit margin, etc. that have a significant impact to the performance of organisation and need to
be reviewed regularly. These will help in providing the adequate information to Airdri about its
operational ability (Soheilirad and Sofian, 2016). This will also enable management in accurately
forecasting internal as well as external factors that have a significant impact on Airdri.
D2. Evaluating how planning tools can help in resolving problems
As discussed above planning tools help in forecasting future events and internal as well as
external factors that can affect operational activities of business in positive way or in negative
way. By providing relevant information about future, this helps an entity in determining and
identifying any obstacles in the future. Management can then by taking economic decisions will
be able to resolve those obstacles. However, these tools also help in providing ways of solution
to the problems.
TASK 4
P5. Explaining how management accounting system helps in responding to problems
In order to achieve targeted objectives, management had to face number of problems in
business operations. With the use of tools and techniques of management accounting, managers
of organisations and small business owners like those of Airdri will be able to respond to their
problems in efficient manner that in turn will increase the efficiency of firm and its performance.
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Below are techniques, with the use of which (Takeda and Boyn, 2014). Airdri will be able to
respond to its problems in a better manner:
Benchmarking: It is one of the most useful management tool. Under this method,
performance of all the organisations is compared with the industry the best performance.
Therefore a target performance is set as a benchmark, to have profit, achieving the set target is
must. And if the company performs more than the set target than it is said to be an extra ordinary
performance of the business. With the help of benchmarking, Airdri retail can set a target of sales
volume, i.e. in order to achieve ordinary profits, reaching to that benchmark is necessary. If
company will not able to achieve that benchmark, then it can be said that the performance of the
business is not up to mark.
Key performance indicator: This helps in measuring the performance of different
performances within an organisation. This is used by managers to analyse and track those factors
that are crucial to the success of a business. These generally focus on those business functions
and operations that are most important for determining the progress and for meeting strategic
goals and objectives of an organisation. With the help of KPI, Airdri can identify crucial
functions and can make decisions focusing on them.
Financial governance: these are those rules that are used by the business in order to
direct and justify their decisions and actions. This helps a business in achieving social, legal and
market environment goals.
Variance analysis: this performance appraisal will help in analysing the actual gains in
compare with the planned targets. However, it will be beneficial in terms of making the adequate
improvements in performance and daily operations of the business. Therefore, it will also fruitful
in investigate the quantitative outcomes of firm which in turn helps in evaluate or determine the
operational strength of organisation.
M4. Analysing response of financial problems in the sustainable success of organisation
Business organisation faces many monetary like financial problems as well as decision
making problems in its day to day operations. These problems need to be look after and adequate
decisions are to be taken (Tucker and Parker, 2014). By responding to problems in efficient
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manner, Airdri will be able to achieve sustainable success in business. Main purpose of
management accounting is facilitating and improving decision making which ultimately helps in
responding to financial problems like low profit, high cost, excess overheads, etc. however,
ultimately solving the financial problems, enables firm in achieving sustainable success. There is
need to examine such weakness of business and make the effective and accurate plan which in
turn brings the financial strength in organisation as well as improve the capital structure of firm.
There will be need to monitor various accounts or budgets of the period which will help in
analysing the profitability and efficiency of firm in meeting the financial requirements.
CONCLUSION
From the above report it has been concluded that, in order to achieve business goals and
objective along with sustainable success, use of management accounting system within the
organisation is necessary. The whole discussion is based on the Airdri. Various management
accounting techniques and tools that would help Airdri has been discussed above along with their
advantages and disadvantages. From the data above, it has also been concluded that income
statement can be prepared using marginal costing system as well absorption costing system and
management should adopt that system which provides higher profit. Income statement has been
prepared for Airdri Using both the techniques, and it can say that, Airdri Should adopt absorption
costing technique as it is showing more profit that will indicate better performance of the
organisation. How management accounting facilitates financial problem and how it can be
integrated within the organisation is also explained above.
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Novas, J., Alves, M. D. C. and Sousa, A., 2015. Management accounting systems, intellectual
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