Management Accounting: Types, Reporting, and Budgetary Control

This document provides an overview of management accounting, including its types and the methods for reporting. It also discusses the merits and demerits of various planning tools within budgetary control. The content covers topics such as absorption and marginal costing, inventory management, and cash budgeting.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Explicate management accounting and their types...........................................................1
P2 Explicate methods for management accounting reporting................................................4
LO2..................................................................................................................................................6
P3 Calculation of cost for preparation of income statement by utilisation of absorption as well
as marginal costs.....................................................................................................................6
LO3................................................................................................................................................10
P4 Explicate merits and demerits of various kinds of planning tools within budgetary control.
..............................................................................................................................................10
LO4................................................................................................................................................14
P5 Comparison of ways in which organisations opt for management accounting systems with
respect to financial problems................................................................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is defined as process of identification , measurement, analysis,
interpretation as well as communication of information to managers for pursuit of goals of
organisation (Aldehayyat and Maan, 2013). This aids management to formulate decisions as
well as inform them about business operation metrics. It is liable for handling of margin analysis
for assessment of profits and also involves calculation of contribution margin for identification
of unit volume at which business gross sales becomes identical to total expenditure. To
understand concept of management accounting Stitchland Ltd is taken into consideration those
deals within manufacturing of clothes but there finances are being handled out by Bright Star.
This report will contain details about management accounting along with diverse kinds of
systems. Apart from this, diverse methods of management accounting reporting have been
explicated and cost analysis with respect to absorption & marginal costs have been calculated.
Furthermore, various types of planning tools have been discussed and comparison has been made
for adapting to management accounting systems for responding to financial problems.
LO1.
P1 Explicate management accounting and their types.
The application of techniques, professional knowledge along with concepts within
preparation of accounting information in such a way that it assists management to formulate
policies and plans for managing operations of organisations as well as development of decisions
is known as management accounting (Anandarajan, Anandarajan and Srinivasan, 2012). This
will assist Stitchland Ltd to analyse performance of firm by speculation of strategies, making
comparisons, forecasting, budgeting and various others. Basically, it denotes presentation of
information associated with accounting for development of policies by adopting management as
well as aids within everyday operations. Stitchland Ltd can utilise these systems for furnishing
their operations with respect to manufacturing.
The systems that involves within internal systems and are being utilised by firms for
measuring as well as evaluating their performance is known as management accounting
system. Stitchland Ltd by making use of this can reach out their all the deparments and make
sure that operations are being carried out in an affirmative manner (Christ and Burritt, 2013).
Objective of this types of systems is to furnish suitable information to managers by which they
1

can formulate their decisions within efficacious way. Therefore, Stitchland Ltd must utilise
accounting systems as this tool includes both financial as well as non-financial information
which assists in management of business.
There is enhanced significance of combination of various accounting systems in a
firm. Stitchland Ltd can make use accounting systems as per their requirements. Like, they can
make use of cost accounting system for management of inventory in an efficacious way. In
addition to this by opting for price optimisation systems Stitchland Ltd will be able to render
framework for identification of prices (Cohen and Karatzimas, 2013). It denotes on the basis of
needs of organisation these systems can be used as each have their own importance as well as
usage.
Origin and principles of management accounting
According to the analysis, management accounting was given by England at the time of
industrial revolution. It includes execution of different activities by which financial problems can
be improvised. The major principles of management accounting involves influence and building
up of trust in context of orientation of organisation.
Divergence among Management & Financial Accounting:
Basis Management Accounting Financial Accounting
Aim They aims to assists management to
develop business decisions.
It aims at furnishing rendering
information to outer parties. They can
be customers, investors, creditors, etc.
as it will assist them within
formulation of decisions (Cooper,
2017) .
Governing
principles
There do not exists standard basis
for preparation of management
accounting statements, they are
formulated with respect to needs of
management team.
The statements are formulated on the
basis of GAAP (Generally Accepted
Accounting Principles). They
comprises of less or more features.
Reporting
beneficiaries
Reports that are build under this are
significant for CEO, promoters,
Financial accounting is developed for
external users, they can be suppliers,
2

directors and higher levels of
management.
banks, government, etc.
Time Horizon It emphasise on future, thus do not
have specified time horizon.
They are formulated with respect past
normally one accounting year.
Types of management accounting systems:
Job costing system: The process of accumulation of information associated with cost in
context of service job or production is referred to as job costing system. This information is
required for submission of cost information to their customers (Daoud and Triki, 2013). It will
assists Stitchland Ltd to identify organisations estimating system that leads to relevant profits.
This is liable for computation as well as assignment of cost associated with different activities
independently. In context of organisation, it will yield them efficacious outcomes with respect to
manufacturing operations.
Cost accounting system: It is also referred to costing or product costing system which
can be utilised by firms for estimation of cost associated with their products for carrying out cost
control, profitability analysis and inventory valuation. Stitchland Ltd needs to acknowledge what
kind of products will be profitable and vice-versa but this can be only carried out when cost of
services have been anticipated accurately. Basically, it is utilised by manufacturers for recording
activities associated with production by the usage of perpetual inventory system (Dillard and
Yuthas, 2013). Through this, they will be able to track inventory flow within different stages
related with production. This can be used by Stitchland Ltd for recognition, classification,
allocation, aggregation as well as reporting of costs along with making their comparison among
standardised costs.
Price optimisation system: A method that is being utilised for determination of desirable
set of prices for plurality of products is furnished, is defined as price optimisation system.
Basically, this is a accounting system that is liable for assigning prices by taking into account
cost and profits along with this satisfaction levels of potential customers are also taken into
consideration. Stitchland Ltd can have more number of customers if they will fix their prices for
products that are being delivered by them.
Inventory management system: The tool that is being utilised for tracking goods
within business supply chain is defined as inventory management system. It leads to optimisation
3

of spanning of spectrum from order placement with vendor till they are being delivered to
customers (DRURY, 2013). In this mapping is carried out with respect to journey of product.
This will aid Stitchland Ltd to evaluate raw materials along with final goods by which entire
process of production can be carried out. In addition to this, it will lead to improvisation within
ways by which demands along with supply of products can be addressed. Their key function is
maintenance of records associated with products which are transmitted to warehouse (Hall,
2012). Stitchland Ltd can utilise these systems within delivery of services that will lead to
enhancement within productivity in given time frame.
Assets associated with management accounting systems:
They consists of assorted kinds of systems and each have their own significance .
Depending upon requirements, Stitchland Ltd can utilise these management accounting systems.
Their implications have been mentioned beneath:
Job costing system: It can be utilised by firms for rendering information that is being
associated with cost of every activity individually (Harrison and Lock, 2017). In addition to this,
such system will provide assistance to Stitchland Ltd with respect to amount needed for
delivering different activities related with production process.
Cost accounting system: This assists within computation of cost of entire systems in
context of operations along with activities that are needed to be performed. Stitchland Ltd need
to analyse profit that can be acquired by them with reference to cost that has been occurred as
well as what they have gained.
Price optimisation system: This aids within identification of prices of services and
goods. In context of Stitchland Ltd they are liable for structures of assigned products with respect
to prices. In addition to this, it will assists within analysis of impact on customers in context of
amount with respect to nominal services.
Inventory management system: These systems are liable for tracking happening of
products along with services that are being carried out in context of availability in warehouse.
With respect to Stitchland Ltd, it aids them to analyse the raw material that is present with them
so that their operations do not get hampered (Hitomi, 2017).
Benefits of the MA systems-
Systems Benefits
4

Job costing system The job costing system allows managers to
calculate the profit earned on individual jobs
which further helps in ascertaining whether
specific jobs are desirable to pursue in the
future.
Inventory management system This system helps in tracking the flow of
inventory from supply chain till its delivery to
the customers and it also helps in maintaining
optimum inventory level within the
organization.
Cost accounting system The benefit of cost accounting is that it helps
an organisation in determining the exact cause
of decrease or increase in profit that may be
due to higher cost of product, lower selling
price or may be due to unproductive activity or
unused capacity.
Price optimisation system It enables in determining the most suitable
price in order to attract large customers for
purchasing the product/service. Furthermore, it
helps in understanding the customer demand
towards the product.
P2 Explicate methods for management accounting reporting.
The process of furnishing guidelines to top management by which efficacious decisions
can be build up in context of business is known as management accounting reporting. Stitchland
Ltd can make use of these reports for evaluating employees performance. Some of these reports
have been illustrated below:
Inventory management report: It is one of the essential activity that is associated with
management accounting for formulation of reports as this renders complete information with
respect to inventory (Ismail and King, 2014). Stitchland Ltd can analyse different aspects with
respect to this such as closing of stocks, storage cost and various others. Along with this,
5

inventory management reports furnish information associated with methods that are crucial for
stocks closing. Its objective is to have a balance among inventory investment as well as customer
services.
Budget Report: Management of Stitchland Ltd is liable for production of these reports
with respect to future so that there operations can be carried out in enhanced manner for
identification business operations so that accordingly they can furnish their activities. This gives
details related with incentives or bonus that is given to employees in case they are able to carry
out their operations in a standard format. This report assists organisation for making sure that
resources of organisations can be used in a suitable way so that overall operations of firm can be
enhanced.
Performance report: This is formulated for conducting performance measurement with
respect to employees are being managed by management accountant. They comprises of in depth
statements associated with incentives which are furnished to employees in terms of performance
appraisals (Lavia López and Hiebl, 2014). It will lead Stitchland Ltd to encourage their
employees so that enhanced results can be attained with respect to activities they have to carry
out. Along with this, it will aid them to furnish effective training to them in this context.
Accounts receivable ageing report: This provides crucial information with respect to
invoices that are being rendered to customers about credits. This will assist Stitchland Ltd to
identify customers who are not paid in terms of both amount and credit memos. This tool will
yield firm affirmative results with respect to effectiveness of credits, gathering of functions and
overdue for payments.
LO2.
P3 Calculation of cost for preparation of income statement by utilisation of absorption as well as
marginal costs.
Absorption & marginal costing:
Absorption costing: This method comprises of expensing entire costs that are related
with manufacturing specified products as well as are needed for GAAP (Generally accepted
accounting principles) reporting externally (Soudani, 2012). This includes fixed and variable
costs of services as well as products that are being offered by firms like Stitchland Ltd.
6

Marginal costing: The decrease or increase within entire cost of production for
formulating additional unit of product is refereed to marginal costing. It denotes that cost is
charged according to cost of units but fixed cost is not taken against contribution.
Difference between marginal and absorption costing:
•Marginal costing does not take fixed cost into consideration under product costing or inventory
valuation whereas absorption costing takes both fixed cost and variable cost into account.
•Marginal costing can be classified into both fixed and variable costs. Absorption costing can be
classified as production, distribution, and selling & administration.
7

8

9

Weighted Average method:
10

LO3.
P4 Explicate merits and demerits of various kinds of planning tools within budgetary control.
Budgetary control: It is defined as method that is being utilised for managing financial
along with performance objectives with respect to actual results as well as modify performance.
In addition to this it will aid managers of Stitchland Ltd to control as well as monitor budgets for
specified financial year. There exists different planning tools related with budgetary control that
are executed by by them. They have been specified below:
CASH BUDGET: This denotes anticipation of cash inflows as well as outflows for
business within specified time frame (Yadav and Sagar, 2013). It can be utilised for assessing
whether entity possess specified cash for carrying out their operations. This budget is formulated
by Stitchland Ltd for identification of whether specified organisation have adequate amount for
carrying out their operations. Firms prepare cash budgets for checking overall transactions as
they are dependent on revenue generation theories. Their pros and cons have been illustrated
below:
11

Advantages:
 Stitchland Ltd can avoid debts by this, it denotes cash must be set aside for critical
situations before they lay within uncomfortable conditions.
 Through this, individual becomes more resourceful. This will assist management of
Stitchland Ltd to reduce the waste that is associated with budget (Aldehayyat and Maan,
2013).
 Efficacious management of cash budget so that overall cash can be maintained within
effectual manner. This acts as effective tool for comparison among other planning
techniques that are being utilised within budgetary control.
Disadvantages:
 Only limited transactions can take place for an instance formulation of cash budget takes
lots of time and also efforts.
 It leads to creation of danger of theft which makes it non-secure tool. This will also limit
spending power of customers as well as Stitchland Ltd.
MASTER BUDGET: The expensive business strategies that formulates anticipated
production levels, future sales, expenses incurred, purchases and loads that have to be acquired
are referred to as master budghet (Anandarajan, Anandarajan and Srinivasan, 2012). This will
aid Stitchland Ltd to develop strategic management plan. It involves financial budgets along with
budgeted income statements as well as balance sheets. It includes strategic plans with respect to
future of organisation. With respect to Stichland Ltd they deals with manufacturing and
production of fashion clothing, so this acts as effectual tool for management of finance. Master
budget can be formulated with respect to production, sales budget and various other aspects of
budgeting. Their advantages along with disadvantages have been mentioned beneath:
Advantages:
 This provides bird's eye view related with business, through this Stitchland Ltd can have
overview of budget of organisation with respect to spending and earnings of firm.
 This denotes ability for identification of problems along with plans. For an instance,
master budget can give details associated with if one department spends more than their
limits and analyse whether they are spending more than what they earn (Christ and
Burritt, 2013).
12

 Master budget acts as essential tool for furnishing motivation to their employees. This
will assist Stitchland Ltd to identify problems at initial steps and resolves them.
Disdavantages:
 The divisional staff of Stitchland Ltd is forced for attainment of targets irrespective of
practical troubles within achieving them.
 It is not easy for Stitchland Ltd to modify the budget. This needs management of
Stitchland Ltd for adding, altering and modifying small alterations there is need of
multiple steps.
Others method of budgetary control:
Activity Based Budgeting:
This is defined as a system that is liable for recording, researches as well as analysis of
activities which leads to costs for organisation. This acts as planning system in which costs
related with budgeted expenditures as well as activities are compiled with respect to expected
levels of activity (Cohen and Karatzimas, 2013). In this case, activity based budgeting are taken
into consideration. Stitchland Ltd can formulate activity budget by diverse activities must be
maintained that affects processes associated with manufacturing, production and various others.
There advantages and disadvantages with respect to Stitchland Ltd has been mentioned below:
Advantages:
 Activity based budgeting furnish competitive edge to organisations as it will aid them to
eliminate unnecessary activities for saving entire cost.
 Budgets are formulated after carrying out deep analysis as well as research. It will
eliminate sorts of bottlenecks that are related with business and activities so that they can
be carried out smoothly.
 This will lead Stitchland Ltd to eliminate digressive elements which assists them to save
cost and also improvise relationship among audiences and organisation (Cooper, 2017).
Disadvantages:
 For preparation of such kind of budget there have to be in-depth knowledge with respect
to understanding of diverse functional areas.
 This budget will aid in preparation of short term objectives but in this case long term
objectives are not taken into account.
13

Zero Based Budgeting: This denotes method of budgeting that considers all the expenses for
specified time period. This begins from zero-base and each function is analysed as per their costs
and needs. In context of Stitchland Ltd, by the usage of this method, emphasis will be on
effectual usage of tools with rerspect to usage of capacity (Daoud and Triki, 2013). There cons
and pros have been depicted below:
Advantages:
 Through this management of Stitchland Ltd can operate their expenses, along with this it
will assist within justification of all the operating expenses and also take into
consideration generation of revenue.
 This will assist within enhancement of accuracy along with efficiency in terms of cash
that inflows. It will also aid to eliminate the misallocation of resources.
Disadvantages:
 They are subjective in nature as it becomes difficult for analysing that whether it is
crucial or not. In this there has to be thorough analysis of entire expenses this denotes that
this is a time consuming method (Dillard and Yuthas, 2013).
 In this case Stitchland Ltd cannot stick to specified budget within each condition as
sometimes unexpected opportunities will lead to threat.
PEST Analysis
It will aid Stitchland organisation to examine external factors that will hinder
performance of organisation from certain uncertainties or risks. These elements have been
illustrated beneath:
 Political factors: This factor is liable to analyse alterations within government policies
and rules that are liable to creation of either direct or indirect influence on operations of
firm (DRURY, 2013). Stitchland Ltd needs to adhere to these regulations so that there
operations are not hampered.
 Economic factors: This comprises of modifications within taxation or interest rates that
creates affect on ways in which transactions are carried out by firm. Stitchland Ltd have
to ensure that these factors are maintained in efficacious manner so that they can carry
out their transactions in required manner.
14

 Social factors: This denotes population, societal culture and various other aspects related
with this. Within Stitchland Ltd, organisation needs to emphasise on social sectors as
well as render quality goods along with services that will aid them within formulation of
affirmative customer base.
 Technological factors: Organisation must keep themselves updated with respect to
advancements within technology. Stitchland Ltd is liable to make use of recent
technology as this will render them with intensified profits in terms of carrying out their
operations as well as provides their customers with quick services (Hall, 2012).
The overall impact of analysing external factors will be effective on organisation and will lead
them to growth as well as enhancement within goodwill.
LO4.
P5 Comparison of ways in which organisations opt for management accounting systems with
respect to financial problems.
There exists assorted types of accounting system within management accountancy for
finding out solutions with respect to financial barriers. In addition to this, diverse types of
techniques are present that will assist Stitchland Ltd to find out solution for situations they are
facing due to finances. They have been illustrated below:
Benchmarking: It denotes procedures that is responsible for comparing business
processes with performance along with crucial attributes with respect vto cost, time and quality
(Harrison and Lock, 2017). In addition to this, it is also responsible for measuring performace
with assistance of peculiar indicator that illustrates cost per unit that has been measured, rate of
productivity and various others.
Key Performance Indicator: This denotes business use for measuring set of quantifiable
by which organisation can standardise their performance before speculated time frame (Ismail
and King, 2014). Key performance indicators will assist Stitchland Ltd within growth of
organisation by attainment by objectives as well as goals by differentiating their performance
with other firms.
Divergence among firms with respect to accounting systems
15

Basis Stitchfield limited Sewport company
Financial Problem They are going through
financial crisis in terms of
competitive prices with respect
to their competitors within
market. This is reason for
decline within rate of sales
(Hitomi, 2017).
They are facing low market
capitalisation and alteration
within demands & supply of
products along with services.
This leads to enhancement
within financial crisis.
Accounting System They have opted for price
optimisation policies for
having intensified results.
They are making use of rigit
inventory management system
through this they can boost job
costing for solving specified
issue. This will create balance
among supply and demand of
stock.
Features of effective management accounting:
 Knowledge of accounting will assist them to have lucid concept of accounting by which
financial data can be managed in an effectual manner.
 Understanding Ability is must as it will assist management to have in-depth knowledge
with respect to ways in which they can carry out their operations (Lavia López and Hiebl,
2014).
CONCLUSION
From above it has been found that management accounting system is essential aspect
within firm as this assists within development of internal decisions. In this report different
accounting systems have been taken into account like cost, price optimisation, job costing and
many others. In addition to this income statements have been formulated with respect to
absorption and marginal costing. Apart from this, comparison has been provided with respect to
different financial issues that are faced by organisation.
16

REFERENCES
Books & Journals
Aldehayyat, J. S. and Maan, J., 2013. The impact of competitive business strategies on
managerial accounting techniques: A study of Jordanian public industrial companies.
International Journal of management, 30(2 Part 1), p.545.
Anandarajan, M., Anandarajan, A. and Srinivasan, C. A. eds., 2012. Business intelligence
techniques: a perspective from accounting and finance. Springer Science & Business
Media.
Christ, K. L. and Burritt, R. L., 2013. Environmental management accounting: the significance
of contingent variables for adoption. Journal of Cleaner Production. 41. pp.163-173.
Cohen, S. and Karatzimas, S., 2013. Has IFRS adoption affected management accounting
systems? Empirical evidence from Greece. International Journal of Accounting,
Auditing and Performance Evaluation, 9(3), pp.268-285.
Cooper, R., 2017. Supply chain development for the lean enterprise: interorganizational cost
management. Routledge.
Daoud, H. and Triki, M., 2013. Accounting information systems in an ERP environment and
tunisian firm performance. International Journal of Digital Accounting Research, 13.
Dillard, J. and Yuthas, K., 2013. Critical dialogics, agonistic pluralism, and accounting
information systems. International Journal of Accounting Information Systems, 14(2),
pp.113-119.
DRURY, C. M., 2013. Management and cost accounting. Springer.
Hall, J. A., 2012. Accounting information systems. Cengage Learning.
Harrison, F. and Lock, D., 2017. Advanced project management: a structured approach.
Routledge.
Hitomi, K., 2017. Manufacturing systems engineering: A unified approach to manufacturing
technology, production management and industrial economics. Routledge.
Ismail, N. A. and King, M., 2014. Factors influencing the alignment of accounting information
systems in small and medium sized Malaysian manufacturing firms. Journal of
Information Systems and Small Business, 1(1-2), pp.1-20.
Lavia López, O. and Hiebl, M. R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of
Management Accounting Research, 27(1), pp.81-119.
Namakonzi, R. and Inanga, E. L., 2014. Environmental management accounting and
environmental management in manufacturing industries in Uganda. African Journal of
Economic and Sustainable Development, 3(4), pp.288-329.
Ross, J. E., 2017. Total quality management: Text, cases, and readings. Routledge.
Soudani, S. N., 2012. The usefulness of an accounting information system for effective
organizational performance. International Journal of Economics and Finance, 4(5),
pp.136-145.
Van Deventer, D. R., Imai, K. and Mesler, M., 2013. Advanced Financial Risk Management.:
Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management.
John Wiley & Sons.
17

Ward, K., 2012. Strategic management accounting. Routledge.
Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches
and perspectives. Routledge.
Willcocks, L., 2013. Information management: the evaluation of information systems
investments. Springer.
Online
Difference between Financial and Management accounting. 2019. [Online]. Available through:
<https://efinancemanagement.com/financial-accounting/difference-between-financial-
and-management-accounting>.
18