Management Accounting and its Systems: A Comprehensive Study

This study report discusses about multiple core elements of management accounting and its systems in relation to UCK furniture. It also involves calculations and explanation about planning tools along with comparison of two entities as to adoption of MA systems.

MANAGEMENT
ACCOUNTING

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Section one.......................................................................................................................................3
1.1 Management Accounting and crucial necessary requirements its multiple systems:............3
1.2 Management Accounting Reporting:.....................................................................................5
1.3 Evaluation of benefits of Management accounting systems:................................................5
1.4 Critical evaluation about how MAS and MA is united within organisation’s processes:.....6
Section Two.....................................................................................................................................6
2.1 Cost card using marginal costing:..........................................................................................6
2.2. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs:..........................................................................9
2.3 Accurately apply a range of management accounting techniques and produce a financial
reporting document:...................................................................................................................11
(a)...............................................................................................................................................11
(b.)..............................................................................................................................................12
3.1. Define and explain the purpose of budget:.........................................................................13
4.1 Compare how organisations are adapting management accounting systems to respond to 19
financial problems:....................................................................................................................19
4.2. Analyse how management accounting can help improve the financial performance of both
...................................................................................................................................................22
companies to achieve the sustainable success:..........................................................................22
4.3 Evaluation of the planning tools:.........................................................................................22
REFERENCES..............................................................................................................................25

INTRODUCTION
Management Accounting contains the procedure of summarising management reports as
well as statements that support to offer reliable and prompt budgetary and fiscal information
needed by senior management to undertake important financial choices. Apart from financial
accounting, which offers annual accounts, management accounting offers regular accounting
updates within the company for users on a regular basis like administrative executives and
managing director (Akbar, 2010). The study report discusses about multiple core elements of
management accounting and its systems in relation to UCK furniture. It also involves
calculations and explanation about planning tools along with comparison of two entities as to
adoption of MA systems.
TASK
Section one
1.1 Management Accounting and crucial necessary requirements its multiple systems:
Managerial Accounting is method of bringing financial reports into the framework. This is
dedicated to information actually required by organizational administration. In simple words,
management accounting is collection of procedures and processes targeted at presenting
information for the managers, taking decisions effectively and retaining good control of
enterprise resources (Callahan, Stetz and Brooks, 2011). Through this
mechanism entity's internal financial dept exchanges records and details (like balance sheets and
payslips) with managers of the organization. The managers use these reports and details to render
informed and reliable business operations, organization, and business productivity decisions.
Main perquisite of management accounting is adoption of systematic framework which
consists of several key processes which enable managers to take effective business decisions.
This also require collection, processing and transmission of critical information for managerial
decision making.
MA is mostly important in providing timely, relevant and effective information to top
management and other key managing personnel. By offering guidance on future expenses and
sales, management accounting makes important contributes to the business's funds forecasts and
long term of fiscal planning. This also provides mentor the cycle of planning, tracking and
managing the budget according to defined strategies and processes. Management

accounting helps to align performance expectations and organization expectations or forecasts
for actual results/outcomes, and evaluate any variances. It is achieved by means of a technique
recognized as the analysis of variation.
The organisations can maximize their degree of efficiency in handling the business
records and records in a smarter way with aid of management accounting
systems. Different system renders the information processing simpler for corporation. MA
system leads to the creation of successful strategic strategies. This lets the organization create
more realistic strategies so that they could better strengthen their performance levels. MA system
is quite helpful when it comes to properly managing the actual expenses of the company. This
specific program helps to recognize the companies 'perfect cost management including cost
controlling approaches which helps to boost the enterprises' performance level.
Inventory management system: It is mainly a practice that defines the configuration and
placement of the raw materials, finished goods, processed goods in storage. It is feasible to
implement the normal and prescribed path of operation and storing of products promptly at
different locations with aim to safeguarding these stock items. This is a system cantered on
a technical method like LIFO, FIFO etc. that are used to track manufacturing levels, orders,
shipments and sales (Hopper and Bui, 2016). In certain scenarios, this method is utilized in the
manufacturing field to generate a purchase order, bills of items, as well as other product-relevant
services. For UCK Furniture it is primarily necessary to use this system in order to suppress
over-storage and often under-stocking concerns throughout inventories handling processes.
Job costing system: This is regulated system of evaluating the costs or expenses they pay
on a single job which is relevant for organization. The framework is widely employed
for allocation of expenses for particular projects of a company. Many companies utilizing this
accounting method to fix specific costs for every job which is effectively needed to lower
manufacturing costs that further lead to optimizing UCK Furniture business's competitiveness as
well as increasing profitability.
Price optimisation: This approach is employed against buyer desire to pay to achieve the
optimal spot pricing or demand maximisation. Company devotes a substantial period to demand
control and ensuring that their products are distributed effectively at the appropriate prices while
also making rational profits. Complying with commercial priorities is necessary for UCK

Furniture to match its customer expectations related to price and demand. In UCK this by this
system entity can fix effective price of products at which demand and profit margin is maximum.
1.2 Management Accounting Reporting:
Cost Report: Costs are determined under this report based on the charges of materials,
wages, overhead costs and other costs/expenses. The overall costs involved in the processing
or manufacturing are divided by the amounts of units processed to come at unit cost. Cost reports
incorporate all details to help managers determine the cost per unit of manufacturing goods to
include an internal accountability framework. In UCK furniture this report is used by production
managers to asses the cost of each manufactured furniture item.
Job Cost Reports: Job cost reports usually imply costs on a particular kind
of job/task that company is undertaking. These are commonly paired with revenue forecasts such
that managing staff can measure the effectiveness of the task/job. In UCK furniture, it allows
them acknowledge the company 'greater-earning zones so that it should concentrate more
attention on tasks with minor earnings levels rather than wasting efforts and energy there.
This report used to review costs as specified job is under way so that excess factors can be
corrected until costs grow out of grasp.
Inventory Report: This essential report is used by almost all the organisation specially
manufacturing concerns like UCK which have wide amount and range of inventories. This
contributes in managing each single items of inventory within entity. This report classifies all the
inventories items based upon their specific importance, cost and process or division. It also
defines basis of measuring of cost of different inventories. In UCK, this report is used by
different units of manufacturing to assess the ultimate value of stock left at the end of a certain
period which may be daily, weekly, monthly or yearly as per the requirement of corporation.
1.3 Evaluation of benefits of Management accounting systems:
Systems Major benefits
Inventory Management System In UCK, this system benefitable for managers
to assess or evaluate the accurate cost of
different range of inventories as well as to
recognise the need of placing order. This also
helpful in pointing out areas which are leading

to increased cost of different inventories.
Job Costing System In UCK, this system is beneficial in several
units which are working on project basis to
establish accountability and asses the cost of
different jobs lined with project.
Price Optimisation This is quite beneficial of UCK in setting
effective and efficient prices for its products
that also ensure maximum demand and
sustainability in profitability margin. It also
provides competitive advantages by assisting
in determining prices’ effect on specific
product item demand (Lavia López and Hiebl,
2014).
1.4 Critical evaluation about how MAS and MA is united within organisation’s processes:
Multiple operations and processes act as core ground of different systems of MA as
organisational processes develop base for adoption of these systems. Outcomes of different
processes of organisation are essential requirements of aforementioned systems. As in UCK,
production, accounting and finance processes are carried out by managers which provides key
information and reports to price optimisation systems and inventory management system like
cost details, inventory status, demands and other accounting or fiscal information (Leitner,
2013). Thus, is essential to integrate all the processes with MA systems.
Section Two
2.1 Cost card using marginal costing:
January February
Particulars Amounts
(GBP)
Particulars Amounts
(GBP)
a) Units Produced
(11000)
Units Produced
(9500)
b) Sales Price Per Desk 35 Sales Price Per Desk 35

c) Variable cost per desk:
Direct Material
(4kg X 3 pounds/desk)
Direct Labour
(4 hrs X 2 pounds/hr)
Variable Overhead
Variable Sales Overhead
12
8
5
1
Direct Material
(4kg X 3 pounds/desk)
Direct Labour
(4 hrs X 2 pounds/hr)
Variable Overhead
Variable Sales Overhead
12
8
5
1
d) Contribution 9 Contribution 9
Total Contribution 99,000 Total Contribution 85,500
e) Fixed Costs:
Production Overhead
(NOTE 1)
Sales Overhead
22,000
2,000
Production Overhead
(NOTE 1)
Sales Overhead
19,000
2,000
f) Profit (d-e) 75,000 Profit (d-e) 64,500
Cost card using absorption costing:
Particulars January February
Sales (A) 315000 (9000*35) 402500 (11500*35)
Cost of Goods Sold:
Direct Material 132000 (12 * 11000) 114000 (12 * 9500)
Direct Labour 88000 (8 * 11000) 76000 (8 * 9500)
Variable Production cost 55000 (5 * 11000) 47500 (5 * 9500)
Fixed production cost 22000 (2 * 11000) 19000 ( 2* 9500)
Over absorption (2000) (2000)
Loosing stock (27 * 2000) (54000) (54000)
Total (B) 241000 200500
Profit (A-B) 74,000 202,000
Working note 1

Production overhead is considered taking into account average production each month, i.e. 10000
units.
Therefore, for the month of Jan. overhead would amount to = (20,000 / 10,000) * 11000
Thus, for the month of Feb., the overhead would amount to = (20,000 / 10,000) * 9500
(b)Explain the potential merits and demerits of the both methods.
Marginal costing method- This can be understood as a type of accounting technique
which is linked to taking fixed cost as cost of period and variable cost as cost of product. It has
some benefits and drawbacks such as:
Benefits: This reduces the level of expenses recover or under recovery because fixed overheads
are separated from production costs (Renz, 2016).
Drawbacks- Cost division into fixed and variable is a challenging task. Fixed costs should not
allow into consideration semi-variable or semi-fixed expenses.
Absorption costing method- It is variant in nature as compared to marginal costing method. In
this fixed cost and variable costs are taken as cost of product. Underneath, its benefits and
drawbacks are mentioned:
Benefits- One of the major benefits of taking absorption costs is that GAAP is compliant and
essential in this method.
Drawbacks- It is not beneficial for operational efficiency (Otley and Emmanuel, 2013).

2.2. Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs:
For the period ending February
Revenue
Revenues for January 385000
Revenues for February 332500
Total revenue (A) 717500
Cost of goods sold
Cost for January 308000
Cost for February 269000
Total Cost of goods sold (B) 577000
Net income(C= A-B) 140500

Descriptions Descript
ions
Amount
(GBP)
Descript
ions
Amount
(GBP)
Units produced 11000 9500
a) Direct Material
(4kilo-
gramx3p
ound/kil
o-
gramx11
000)
132000
(4kilo-
gramx3p
ound/kil
o-
gramx95
00)
114000
b) Direct Labour
(4 hours
x
2pound/h
ours
x11000)
88000
(4 hours
x
2pound/h
ours
x9500)
76000
c) Variable Overhead
(5GBP/d
eskx110
00)
55000
(5GBP/d
eskx950
0)
47500
d) Prime Cost 275000 237500
e) Production overhead 20000 20000
f) Cost of goods produced 295000 257500
g) Variable revenues cost
(1pound/
deskx11
000)
11000
(1pound/
deskx95
00)
9500
h) fixed selling cost 2000 2000
i) Cost of Goods sold 308000 269000
Workings- Cost of Goods sold January February

In accordance of above prepared income statement under marginal costing, this can be
finding out that value of net profit is 75000 pounds for month of January and 64500 pounds for
month of February. On the other side, under absorption costing method profits are 74000 and
202000 for similar time span.
2.3 Accurately apply a range of management accounting techniques and produce a financial
reporting document:
The MA has a broad variety of accounting methods and reports that fit with the method
and activity of the firms. The techniques which are used under report are absorption and
marginal. Each of them is useful for preparation of income statement. Though both have
different way to consider the costs (Kotas, 2014).
(a)
Month Hours
Spent Expenses
January 630 7960
February 505 7410
Mar 705 8285
April 555 7535
May 780 9110
June 795 9820
Highest number of hours = June =
795
Lowest number of hours = February
= 505
Variable cost= (9820-7410)/(795-
505)
Variable cost= 8.310345 GBP per
unit

fixed cost= 9820 - (795x8.31)
fixed cost= 3213.55 GBP
expenses for july= 3213.55 +
(650x8.31)
expenses for july= 8615.05 GBP
expenses for august= 3213.55 +
(750x8.31)
expenses for august= 9446.05 GBP
(b.)
Opening
Inventories
0
Purchase 100
Units
10 1000
200
Units
11 2200
130
Units
13.84615 1800
LIFO
130 13.84615 143.85
200 11 2200
70 10 700
Cost of Goods Sold 3043.85
Value of closing stock (30 x 10) 300
FIFO
100 10 110
200 11 2200

100 13.84615 1384.615
Cost of Goods Sold 3694.615
Value of closing stock (30 x
13.84615)
415.3845
AVCO 100 10 1000
200 11 2200
130 13.84615 1800
Average Cost (13.84615 + 11 +10)/3 11.6153
8
Cost of goods
sold
4646.154
(400x11.61538)
Closing Stock 348.4615
3.1. Define and explain the purpose of budget:
The budget represents the forecast of revenue and expenses for a given potential
timeframe which is usually collected which regularly re-evaluated. Budgets for an person,
families, community of persons, companies, a government, a society, a global corporation, etc.,
may be drawn up. It has below mentioned purposes which are as follows:
 Budgets allow administrators to analyze the appropriate implementation issues. This
becomes possible because managers become able to find out different types of issues
regards to variances.
 Budget is used to determine an organization's priorities and goals. In fact, the budgetary
control is used to check these strategies and targets.
 This enhances the credit value of an entity from organizations can rise appropriate
financing through banks and financial entities (DRURY, 2013).
 Budgeting promotes workplace productivity and offers opportunities for successful
employees. This is so because by help of it, employees’ actual performance can be
measured in an effective manner as well as corrective actions can be taken by companies.
The method of making a budget deprives executives of their short-term, day-to-day market
strategy and causes them to consider longer. It is the primary objective of budgeting as the

administration does not accomplish its fiscal targets-it at least focuses on the economic and
financial position of the business and how to improve it (Herzig and et.al. 2012).
Preparation of Budgets:
1) schedule of
expected cash
collections for
September
Descriptions September
(GBP)
Cash Sale 39000
Collection for
revenues on
account:
July 392
August 4416
September 840
Total
collections
44648
2) Schedule of expended cash disbursements for merchandise inventory purchases in
September

Descriptions September
(GBP)
Payment for
inventory
purchased in
September
4800
(24000x.2)
Payment for
inventory
purchased in
August
15000
Total
disbursement
for inventory
purchase
19800
3) Cash

Budget
Descriptions September
(GBP)
opening
balance
(A) 20000
Collections
Cash Sale 39000
Collection for
revenues on
account:
July 392
August 4416
September 840
Total
collections
(B) 44648 64648
Disbursements
Payment for
inventory
purchased in
September
4800
(24000x.2)

Payment for
inventory
purchased in
August
15000
Selling and
administration
expenses
9000
(excluding
depreciation of
4000)
Purchase of
equipment
18000
Dividend to be
paid
3000
Total
disbursements
(C) 49800
Balance (A+B
-C)
14848
Financing
Activity:

Loan Taken 1152
Closing
Balance
16000

4.1 Compare how organisations are adapting management accounting systems to respond to
financial problems:
Each organisation has its own structure and its operational framework but management
accounting is essential aspect of every organisation. To an extent there may be difference in
adaption of multiple systems of MA but main objective of adapting the MA system is to support
managerial decisions. Moreover, there within an organisation there may be difference in adaption
of these systems in different units, as UCK furniture has two separate division Table Division
and Drawer Division. For comparison purpose company Dare Studio has been selected which is
a British design corporation that manufactures award-winning, luxurious furniture for luxurious
housing interiors and higher specification contracts environments. Both these originations are
operating in same sector but facing different financial problems. In this regard following is a
comparison about how organisations UCK furniture and Dare Studio, adapting MA systems to
respond to their financial problems, as follows:
UCK furniture Dare Studio
UCK furniture is mainly facing problem of
increasing inventories costs which affects
company’s overall operational efficiency and
profitability.
Dare Studio is struggling with the problem of
decreasing demand in company’s products due
to ineffective pricing policies which affects
company’s growth and turnover.
The above financial problem in company
shows that UCK is not able to handle its
inventories items and thus company should
adopt inventories management system.
Dare Studio’s managers are not able to
determine appropriate prices of company’s
product; thus, company should adopt price
optimisation system.
By adapting inventory management system
managers in UCK can easily track the
movement of inventories and allocate the main
reason of increasing inventories costs.
Through price optimisation system, managers
in Dare Studio can easily evaluate the effect of
change in price on each specific product’s
demand.
Inventory management system provides
detailed analysis and thorough review of all the
inventories processes and costs related to
inventories.
Price optimisation system provides
comprehensive analysis of relationship among
prices of different products and responses of
customers.

Therefore, above comparison shows that clear difference how different originations
adapts management accounting key systems according to their financial problems. In both
organisations managers are using different systems but overall aim here to adapt these systems is
to respond to specific problem and support managerial as well as organisational functions.
4.2. Analyse how management accounting can help improve the financial performance of both
companies to achieve the sustainable success:
MA allow managers to compare two or more organisations with help of its systems and
techniques. Ratio analysis is one of the key techniques of MA which involve mathematical
calculation of ratios to assess the actual performance of a company as well as to make
comparison of two organisations (Cazier, Rego, Tian and Wilson, 2015). In this regard following
is comparative analysis of UCK Furniture Design Division, UCK Furniture GearBox Division
and UCK Woodworks, as follows:
UCK Furniture Design Division
ROCE= 25.49784 %
UCK Furniture GearBox Division
ROCE= 11.27466 %
UCK Woodworks
ROCE= 8.562108 %
Return on capital employed = Operating Profit/ Capital employed x 100
i) Return on capital employed (ROCE)

ii) Assets Turnover
Assets turnover = Revenues/Total assets
UCK Furniture Design Division
Assets turnover = 0.562771
UCK Furniture GearBox Division
Assets turnover = 0.779831
UCK Woodworks
Assets turnover = 0.191801
due to absence of information relating to net assets, capital employed has
been assumed as net assets

iii) Operating profit margin
Operating profit margin = Operating Profit/
Total revenues x 100
UCK Furniture Design Division
Operating profit margin= 45.30769 %
UCK Furniture GearBox Division
Operating profit margin= 14.45783 %
UCK Woodworks
Operating profit margin= 44.64056 %
ROCE: It is mathematical measure which describes the profitability level of a business and the
effectiveness of capital employed. As per above table ROCE of Design division is 25.50% while

Gearbox and Woodworks division has reported ROCE of 11.27% and 8.56% respectively. This
UCK’s design division is more efficient in capital usage.
Asset Turnover: The asset turnover percentage evaluates the efficacy of company's assets to
revenues or sales generation. It measures revenues or sales in used to its overall assets. Asset
turnover ratio of Design division, Gearbox division and Woodwoks are 0.562771, 0.779831 and
0.191801 respectively. This shows that Gearbox Division is more efficient to utilise its assets for
generating sales as compare to other two.
Operating Profit Ratio: This is performance measure that represents a corporation's proportion
of earnings from its sales, before taxation and interest costs are excluded. As stated in above
table Design division of company is providing maximum operating profit margin i.e. 45.30769
percent while operating profit ratio of Gearbox and Woodworks are 14.457 and 44.640
respectively. This reflect that profitability generation capacity of Design division is highest as
compare to other two.
4.3 Evaluation of the planning tools:
Planning tools typically involve predicting, financial management, performance review,
decision-making, designing layouts and graphics for a conceptual analysis. Both financial
planning and budgetary steps are acts taken to create a suitable monetary and administration
approach. The approaches used in operational performance evaluation for fiscal planning and
strategic planning assist and its growth potential. The usage of certain techniques of
Planning used in budgeting is employed for technical analysis of companies. Here are several
major planning tools, as follows:
Budgeting: It is a framework by which the company develops a fund-investment plan. The
budget is named for the spending program. The preparation of a budget proposal allows
administrators to determine ahead what they have ample funding to do or intend to do stuff. Cost
toward organization revenue is determined effectively by budgeting.
Budgetary control: It entails a process by which predications are formulated for coming
timeframe and where appropriate, compared with actual results in order to determine variance.
Attempting to compare budgetary forecasts with actual data will help administrators recognize
gaps and take preventive action effectively.
Project appraisal: It entails a common concept which refers to the way in which resources are
distributed and a challenge occurs for the continuation of a given project in a structured manner.

Simply put, it is the science to calculate project viability. Assessment is a vital decision-making
process, which provides the framework for adoption and promotes spending project funding
(Fullerton, Kennedy and Widener, 2014).
Standard costing: This means actually substituting / supplanting an
estimated/estimated expense for true costs in financial accounts. The gaps among the expected
and true costs are then recorded to reflect the disparity.
Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success:
Financial problems are core obstacle for business which directly affect the way to
organisation’s sustainable success. Timely responding to these financial problems is necessary as
if financial problems are ignored or not timely responded then in long run these can affect the
survival of business. Management accounting and its multiple systems are designed as per the
organisational structure of entity and covers wider range of organisational activities. These all
systems individually and separately provide crucial information which managing officials can
use in dealing with and responding to different financial problems. As discussed above Dare
Studio and UCK furniture are using different systems based in their need and specific financial
problems. These systems offer preventive framework which further restrict occurrence of new
financial problems. Comparison in above part shows that its is essential for each organisation to
adapt such systems as per their needs and financial issues as these systems offers flexibility.
CONCLUSION
From the above study it has been analysed that MA is wider aspect which covers wide
range of systems and techniques for managing business operations. The method/systems of MA
therefore allow the organization to recognize the probable plan of action that leads to the future
benefits. This is an unquestionably resource planning tool and helps to forecast future operational
paths. MA overcomes the process needed to plan and organize an operation that helps to make
good choices.

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