Management Accounting System: Requirements, Methods, and Benefits

This document provides an overview of management accounting system, including its essential requirements, different methods, and benefits. It discusses the inventory management system, cost accounting system, and job costing system. The document also explores various management accounting reporting methods and the integration of management accounting and reporting systems. It is based on a case study of ABC Limited, a manufacturing company.

MANAGEMENT
ACCOUNTING

Contents
INTRODUCTION...........................................................................................................................................3
TASK 1..........................................................................................................................................................3
Essential requirements of different types of management accounting system.........................................3
Different methods used for management accounting reporting...............................................................5
Benefits of management accounting system............................................................................................6
Integration of management accounting and reporting system..................................................................7
TASK 2..........................................................................................................................................................8
. Calculation of marginal and absorption costing.....................................................................................8
TASK 3........................................................................................................................................................10
Advantages and Disadvantages of various planning tools for budgetary control...................................10
TASK 4........................................................................................................................................................12
Adaption of management accounting system to solve financial problems.............................................12
Analyzing planning tools in solving financial problems........................................................................14
CONCLUSIONS...........................................................................................................................................14
REFERENCES..............................................................................................................................................15

INTRODUCTION
Management accounting is the application of skill and preparing information on various
accounts which help the management of the company in making policies for future planning and
carrying on the operations. It is used to provide information to the internal users and helps the company
in making decisions. With the help of available information, statistics and other financial as well as
non-financial data, the managers and employees can make sound investment decisions. The
objective of management accounting is to provide all the necessary financial information to the
management for making decisions. For further information on management accounting, the report will
state various requirements of management accounting systems which includes Cost accounting system,
Inventory management system, and Job costing system. The present report is based on ABC limited
which is a manufacturing company. The present report will discuss different types of
management accounting systems available and how organization can seek benefits. Further, the
report will discuss about the concept of management accounting reporting and it uses in decision
making. Income statement under marginal and absorption accounting of ABC limited using
appropriate technique for analyzing cost factor will be disclosed.
TASK 1
Essential requirements of different types of management accounting system
Management accounting helps internal users in providing all the relevant information. It
takes financial information of the company and develop reports which are used by managers.
Management accounting system of the company makes it easy for mangers by collecting
information based on trend charts, budgeting, break even charts etc which help the company in
forecasting future. It helps the company in improving its performance and increase its efficiency
and effectiveness (Martello, 2016). The management accounting system identifies, analyses and
record all the quantitative transactions which lead to overall development of the company.
Inventory Management System – This method of management accounting emphasizes
on cost controlling function which has been incurred on producing goods and services for
meeting the customer demands. It also assists in managing inventory and stock level of the
company. ABC limited can assess, monitor and track the quantity of goods, inventory and stock
through the supply chain or with the help of areas in which business operations takes place
(Gunarathne, 2018). This method helps company in making inventory valuation, improving the
accuracy of inventory by maintaining continuous workflow and its reorder so as to facilitate
smooth functioning of business operations. Valuation of inventory can be done with the help of
following two methods:
1. LIFO – It stands for Last In First Out. In this method, goods which are bought or
purchased at last are available for sale at first place.

2. FIFO – This stands for First In First Out, it emphasizes on selling first of that stock
which is purchase or bought in at first place.
Cost accounting system
Cost accounting system of the company helps the company in estimating its cost for their
particular products that are being offered to the customers for the purpose of profitability
analysis, valuation of inventory and controlling cost. It tracks the cost of raw materials as they go
through the stages of production . When company come to know about exact costing of products,
it can be critical for the production. It helps ABC limited in figuring out which products are
profitable and which are not. It takes raw materials, work in progress and finished goods for
preparation of financial statements. There are two main cost accounting system that includes:
Job order costing – It combines manufacturing cost separately for the job or task. It fits
to the firm who operated in unique and different products and can help the firm in finding out
which product is generating the highest profit.
Process costing – It collects manufacturing cost for each process separately. The firms
who involves in different departments and cost flow from one department to another can use
process costing.
Job costing
The information provided by job costing system helps in determining accuracy of estimating
system of company. This method is used when there are various products produced by the
company and have different cost. It included direct material and cost of direct labor that is used
in carrying out the particular activity along with overhead costs that includes depreciation, rent
etc. This system helps in improving efficiency of the company and to now better performing
product or service by comparing standard and actual performances of all the products. The job
costing method of management accounting is that business practice which aids ABC limited in
collecting and analysing all the important and relevant information related to the cost incurred
with the production function of some specific job or product group. It acknowledges company in
assessing the cost of operations and helps in taking corrective measures by minimising the cost
of that activity which is incurring more cost expense (Toussaint and et.al., 2015.). This method
considers each part of information which relates to direct materials, labour and overhead costs.
Under this system, information related to cost incurred for every job work completed is provided
to the customer for getting cost reimbursed as per the contract or agreement made. This system
helps in improving efficiency of the company and to now better performing product or service by
comparing standard and actual performances of all the products.
Different methods used for management accounting reporting

Management accounting reports help business in getting all the relevant information
related to the business and to enable the manger of the company to know the true picture of the
company. To get an overall picture on business performance and finance, the management
reports need to be out on every quarterly or yearly basis. These reports helps in providing
transparency to the stakeholders of the company as well as provide accurate data for further
analysis. The various types of reports that are used by management are -
Budget reports – These reports are important in analyzing, evaluating and monitoring
performance of the company and can be generated for whole business or particular department.
A company's basic work is to create budget which helps the company in estimating cost of the
business. The preparation of the budget can be done on the basis of previous experience (Mahal,
2015). A budget of the company consists of income and expenditure sources of the company and
achieve its goals while staying in the budget. It helps the company in cost cutting and provide
employees with incentives. The budget report lays emphasis on making future projections and
estimation related to the amount of money to be spent on business operations. By making
budgetary plans and strategies ABC limited can conduct business operations smoothly with the
limited amount of budgeted amount and resources. With the help of budget report, a company
can make assessment of its performance as well as profitability level. Budget are prepared on the
basis of previous experience business has met with. With proper estimates and budget, company
can deal with future contingencies and cost expenses.
Account receivable aging report – It plays an important role in the business as it offers
credit to the customers. Based on these reports, the company analyses the customers and their
credit worthiness. It provides credit balances that company owes from the customers
segregated in categories of items that are 30, 60 and 90 days. These reports help the company
in tightening their credit policy accordingly. Such kind of report is helpful in case where
company conducts its business operations with the help of acquisition of raw material, labour
on credit basis. It is best suited for ABC limited it has to rely on large credit amount for
carrying on business activities. With the help of this report, the manager of ABC limited can
monitor and determine all the potential defaulters in context of non-payment of money. It
also helps in assessing the problem or issues which the company is facing in its money
collection process.

Cost Managerial Accounting Report – This accounting report helps ABC limited in
assessing and determining the amount of cost incurred for undertaking the manufacturing and
production function of any product or services. This assessment takes into consideration all the
cost related to raw material, overhead, labor and others factors. This helps managers in realizing
the cost and selling prices of their products and services which further helps in estimating the
profit or revenue amount for the company in the near future.
.
Performance report – These reports are prepared to review the performance of
employees as well a company at the end of the year. It helps mangers to make important
decisions regarding the organization. These reports helps in making organizational strategy
according t the performance of the employees of the company and also act as a base for decision
making. . It assists in evaluating the performance level of each employee of the company and
team as a whole involved in particular business activity or task. By using these performance
reports, the ABC limited can make important strategic decisions and plans for the betterment of
company, future growth and success of business organization. Performance related report
provides a deep insight about the working process, procedures used by the company in carrying
on business activities (Weygandt, and et.al, 2017). By framing and implementing strategies and
plans, company can achieve its business goals and continuous tracking of these strategies timely
can improve business standards as well.
Benefits of management accounting system
Evaluation of management accounting system are:
Inventory management system
Pro Con
It helps in cost cutting by saving a lot of
money and increases speed of the operation.
It increases performance delivery of outputs
and lead to efficient operations in the
company.
It increases burden of day to day updating.
The installation cost of the system is high.
It helps in controlling many risk but get open
to other risks.

It helps in asset tracking and saves time and
energy. It increased the efficiency of the
organization.
Cost accounting system
Pro Con
It allows the company to have separation in
cost.
It helps company in estimating the cost of the
product (Garrison and et.al., 2011).
It is easily adaptable in the organization and
provides ease of monitoring and control labor
costs.
This system record past performances which
does not help the company in taking future
decisions.
Installation of this system requires
maintenance of costing record which needs
heavy expenditure.
Job costing system
Pro Con
It helps the company in figuring out trend
analysis through compilation of historical costs
(Advantages and disadvantages of Job costing
system, 2019).
It helps in finding out cost of each job which
helps in finding out that which department is
performing better.
This system does not provide any
standardization.
When inflation hits, the comparison of jobs
became meaningless.
It is expensive method and there is no
standardization of job in job costing.
Integration of management accounting and reporting system
The integration of management accounting system and reporting system in the company
works together which helps the company in reducing its cost and create efficient operations. The
cost accounting system of the company helps in providing cost reports to the company which

helps the company in deciding the price of its product by keeping in mind the competitors of the
company (Toussaint and et.al., 2015). The job costing system enable the company in giving
efficient job costing reports which give clear information to the company that which project is
profitable and which project is not. The other way in which both job costing system and report
are integrated is that they the job costing system includes direct material and cost of direct labor
that is used to make efficient job reports of the company. The inventory management helps in
making inventory reports on raw materials, in process goods and final goods which helps the
company in tracking inventory records of the company.
TASK 2
. Calculation of marginal and absorption costing
Marginal costing
a) Marginal costing
Statement of profit or loss for January 2019 Variable Costing
Per Unit Budget Actual
Sales Revenue:
£
£
£
£ £ £
Cost of Seles 50
Direct Material 10 180,000.00 190,000.00
Direct Labour 20 360,000.00 380,000.00
Variable
Production Overheads 5 90,000.00 95,000.00
standard production
Cost 35
630,000.0
0 665,000.00
+ Opening Inventory 0 0
- Closing Inventory -70,000.00 -105,000.00
standard Cost of Sales
Variables 35
-
560,000.00 -560,000.00
Contribution 15 240,000.00 240,000.00
Fixed
Overheads -100,000.00 -100,000.00
Profit 140,000.0 140,000.00

0
Absorption costing
b) Absorption costing techniques
statement of profit or loss for January 2019
Per Unit Budget Actual
Sales Revenue:
£
£ £ £
£
£
Cost of Seles 50
Direct Material 10 180,000.00
190,00
0.00
Direct Labour 20 360,000.00
380,00
0.00
Variable Production
Overheads 5 90,000.00
95,000.
00
Fixed Production Overheads 5* 90,000.00
95,000.
00
standard production Cost 40 720,000.00
760,0
00.00
+ Opening Inventory 0 0
- Closing Inventory -80,000.00
-
120,000
.00
standard Cost of Sales 40 640,000.00
640,00
0.00
standard Profit 10 160,000.00
160,00
0.00
Adjustment for Under absorption -10,000.00
-
5,000.0
0
Profit 150,000.00
155,0
00.00

TASK 3
Advantages and Disadvantages of various planning tools for budgetary control
The company uses various planning tools to control their budget to exceed the revenue
and to deal with various uncertainties that the business can face in its lifetime (Maas, 2016). The
budget of company is prepared by keeping various factors in mind so that the operations of the
company can work smoothly and efficiently. There are various planning tools used by the
company in control their budget which are –
Fixed budget – A fixed budget tool which is prepared at the beginning of every financial
year and is used by a company as a planning tool which is based on the assumption that company
will sale specific amount of goods during particular period. These budgets are based on fixed set
of volume of sales or profit. This is the easiest way to plan expenses and operations of the
company, the company assumes sales volume and total revenue.
Advantages Disadvantages
Fixed budget helps in maintaining consistency
and to segregate priorities.
As static budgets are pre planned they do not
require to be changed within the accounting
periods.
It is easier to evaluate profits in fixed budget
as the money allocated in the budget remains
the same.
Flexibility is where the fixed budget lacks.
Fixed budget can’t comprehend when
unpredictable situations are faced by the
business.
Resources allocation cannot be changed when
needed which can affect the revenue
generation of the business.

Flexible budget - It is flexible budget tool which is a series of multiple budgets created
throughout the financial year of the company to manage the finances in the business. Its ability to
change and adapt with the change in business situations provides it with more sophistication
when variations occur in the company (Toussaint and et.al., 2015). This kind of budget can adapt
as required in favour of the business. During unexpected situation a flexible budget can be the
key to handle the unexpected situation.
Advantages Disadvantages
It helps in taking optimal advantage of the
opportunities arises.
The changes in cost and expenses can be
handled efficiently by adapting to those
changes via changing the flexible budget
(Gunarathne, 2018).
It stays updated with the current data of the
business which helps in analysing the revenue
and expenses optimally.
As it comprises of series of multiple budgets it
can be a time consuming process for the
business to create flexible budget.
The business can face difficulty in forecasting
future expenses which makes flexible budget
less useful.
The flexibility of the flexible budget can be
harmful to the business as it allows changes in
the budget which complicates the whole
budget.
Activity based budgeting – This budget helps the company in recording, researching
and analyzing activities that are responsible for cost of the business. This budget search for
efficiency in the business and prepare the budget accordingly.
Advantages Disadvantages
It records all the activities that incurred cost in
the organization.
It allows management of the company to have
increased control on the process of budget and
link the budget with specific goals
It is costlier than other budgeting techniques
and requires more information and time to get
developed.
It requires huge amount of resources of the
company for analysis of variance in the budget.

TASK 4
Adaption of management accounting system to solve financial problems
Benchmarking - Benchmarking is the method which compares actual performance with
the standard performance which is set by the company as a benchmark that is need to be
achieved by the company. It helps the company in setting up of budget goals and financial
performance goals (Bromwich, 2016). Benchmarking helps in find out how departments of the
company perform individually and in the industry as whole. The company go through many
financial issues therefore benchmarking helps ABC limited in not only serves as a performance
metric but also provide a way in improving and take corrective measures to solve big issues. It
helps in setting margins of gross, operating and net profit.
Balanced scorecard - Balanced scorecard is used by the company to achieve its goals by
solving financial problems of the company. With the help of balanced scorecard, company can
solve the entire traditional accounting system problem. It shows overall information about the
company while considering objectives of the company (Bobryshev, and et.al., 2015). The
balanced scorecard links performances and compares it by taking 4 perspectives into action. It
links performance as how customer see the company which is Customer perspective, how
company can better at its operations which conclude internal perspective, how more can
company improve which deals with innovation and learning aspect and at last how shareholders
are being treated in the company analyse by financial perspective. Balance card minimizes the
load of passing information by limiting the number of measures used. It also helps manager to
see which area of the company needs improvement which can be achieved by limiting the
expense of other area.
Variance analysis - This is used by the company as statistical investigation between
actual and planned behaviour of the company. It solves various financial problems of the
company like it helps in controlling the cost of the company. It helps in differentiating the gap
between projected results and desired results (Klychova, and et.al., 2015). It highlights
deviations which are affecting financial performance of the company and finds out cause of

losses, errors and wastage. It facilitates measurement of performance and helps in controlling the
level of responsibility throughout the company which includes various departments, divisions
etc.
Key performance indicator - KPI is used by company to monitor its growth and progress
in achieving goals and financial results. KPI focuses on gross margin, current ratio etc. It helps
the company in translating its corporate vision into goals that are measurable KPI helps the
company in making recommendations to improve future performance of the company. .These
KPIs are monitored by the management of the company which allow company to take action in
case the KPI are not in line as was expected by the company. Company use KPI at multiple
levels in their daily working operations to evaluate success at reaching goals by using open and
communicative environment which includes quality feedbacks regarding performance of the
employees. Financial KPIs are based on balance sheet and income statement components that
record changes in sales growth which enable the company in finding out real reason for declining
in growth.
Financial governance - It is the tool which helps the company in collecting, managing,
monitoring and controlling financial information. It makes sure that the company follows all the
rules and regulations mentioned by the government (Financial governance, 2019). It helps the
company in handling its operations, disclosures and compliance from customers. When financial
governance of the company is not up to the mark, it leads to fraud, errors, penalties and lead to
poor decision making, reduction in shareholders and bad reputation of the company. Efficient
financial governance controls internal data of the company; checks flow of work, tracks data and
its validation, security of data and take care of financial policies that are mentioned by the
government (Lapsley, 2017). It is important tool to solve financial problems which allow
company to have controls on its operations and workflows. It solves the problem of high risk as
it assesses the risk and increase time of response and gets quick insights of upcoming threat of
business which can affect the compliance and reporting of the company.
Analyzing planning tools in solving financial problems
ABC limited uses key performance indicator as financial tool to solve the problem of
inventory management system. Inventory management system takes care of the inventory of the
company, inventory can be either stock that is getting used in particular task, input as in process
of production or final goods that are to be send to the customers (Quattrone, 2016). IMS
combines use of various technologies like barcode printers, mobile devices etc to manage the
management of inventory which includes goods, consumables, stocks etc. IMS create orders of

purchase, receive and dispose inventory, create orders of sales, ship the inventory, print barcode
labels. To check on performance of the IMS, KPI at multiple levels checks operations of IMS to
evaluate success at reaching goals. It uses low level KPI that deals with particular department
process like HR, Sales, Marketing, and Production etc.
The other EFG company uses Benchmarking technique to solve problems in Job costing system
in which benchmarking techniques compares the standard performance set by each job of the
company with actual performance and help company in finding out the areas where it can
improve and also compare the sales and revenue of companies each department with other
competitors.
CONCLUSIONS
The report included that how useful management accounting is in the company for
managing reports in internal environment of the company for internal users. However, to make
the work more efficient, company uses different accounting systems which help in preparing
various reports like job costing, cost, inventory reports which helps in achieving goals of the
company. The report concluded various performance indicators that are used by the company in
analyzing their performance in reference to cost, sales etc. Moreover, the report summarized
various budgets and their application of use in the company.

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