Management Accounting: Concepts, Techniques, and Tools

This document provides an overview of management accounting, including its concept, methods of reporting, techniques of cost analysis, and planning tools for budgetary controlling. It is suitable for students studying management accounting or related courses.

Management accounting
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Concept of management accounting.................................................................................3
P2. Methods of management accounting reporting................................................................6
TASK 2............................................................................................................................................7
P3 Techniques of cost analysis .............................................................................................7
TASK 3..........................................................................................................................................13
P4 Planning tools used for budgetary controlling................................................................13
TASK 4..........................................................................................................................................15
P5 Management Accounting System....................................................................................15
CONCLUSION ............................................................................................................................17
REFERENCES..............................................................................................................................19
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INTRODUCTION
Management accounting refers to an assistance tool used by managers, this tool helps
them to formulate plans to achieve long term and short term objectives of the firm. It helps
managers by analysing and interpreting results provided by financial accounting. Management
accounting aims at improving quality of information provided to management about business
operations, with the help of this information, managers decide their future course of action
(Bobryshev and et.al., 2015). This report is drafted by consultancy firm AJ and sons for their
client Innocent Drinks. Innocent drinks is in business line of manufacturing juices and smoothies
which are sold in supermarkets, it is headquartered in United Kingdoms. This document is
divided in three parts, where, first part throws light upon management accounting systems and
how they are applied on business processes. Second part focuses on application of management
accounting techniques on a given set of data. Last part studies about use of different type of
planning tools in order to solve financial problems faced by Innocent Drinks.
TASK 1
P1 Concept of management accounting
Management accounting (often referred to as managerial accounting) is the process of
conducting various studies on all facets of accounting information, in order to help managers to
frame policies and also do planning for future actions. It is for internal use to make perfect
business plans while, on the contrary, financial accounting aims at furnishing internal as well as
external related parties with financial information (Chenhall and Moers, 2015).
Basis of comparison Management accounting Financial accounting
Meaning An accounting system which
assist managers to formulate
policies and strategies using
results of financial accounting
An accounting system, that
only prepares financial
statements, and gives no
comparison or analysed
results.
Compulsion It is not compulsory to do It is compulsory for every
organisation.
Users Internal users Internal and external
stakeholders.
Information Provides monetary as well as
non monetary information
Provides only monetary data
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Time period There is no fixed time frame to
conduct analysis
On the contrary, time frame is
fixed, usually, one accounting
year to prepare financial
statements.
Importance of management accounting is elaborated below, which proves why it should
be used by Innocent Drinks, though there is no compulsion:
 Decision making: The basic purpose of doing management accounting is to assist
management in decision making (Ghasemi and et.al., 2016). In this, various
analytical charts, tables, forecasting can be done done to help managers of
Innocent Drinks to formulate their policies and strategies.
 Identification of problem areas: There may be some problems that may arise in
future, and with the aid of management accounting, managers of Innocent Drinks
can foresee those problems and will prepare their organisation accordingly.
 Price setting: Various tools of management accounting provide essential
information to marketing and production managers, in order to help them to fix
prices of their products.
Innocent drinks can adopt practice of management accounting in order to make required
changes in policies and strategies. Management accounting is a useful aid for every function of
Innocent drinks like, marketing, production, sales, finance, etc.
Management accounting is related to every department of business and results into a
management accounting system, some of them are explained below: Cost Accounting system: It is branch of management accounting which analyses and
interpret all types of cost incurred in an organisation. This process helps managers to
analyse which cost centre has excess expenses and which area needs more investment, so
that, they can generate more returns (Kostyukova and et.al., 2018). Innocent drinks can
use this system to analyse cost of different activities, this will help mangers to see their
incurred cost pattern, and will help them to go for cost cutting on high cost consuming
centres, and then, they can take required corrective measures. Inventory management system: Inventory management refers to management of
inventories of a company. This management starts from planning of ordering and ends
with the exit of it from company. This means, that from where to purchase, what and how
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much to purchase, where to store, and how they will go out for production or sale, all
tasks come under inventory management system. There are several methods to record
inventory, namely, FIFO, LIFO, Weighted average, etc. (MaasSchaltegger and Crutzen,
2016). Choice of methods depends on number of factors like nature of inventory,
warehousing facilities, etc. Since, Innocent drinks deals in perishable products like
juices , smoothies, therefore, it is advisable that they should use FIFO method as this
means that product will take exit first, which came first. Use of this method will lead to
minimum wastage.
 Price optimisation system: There are basically three factors which are considered in this
system to set price for a product:
 Willingness to pay: This willingness of customer to pay for a particular product
depends on competitors rates, location, satisfaction expected out of brand or
reputation of brand in market. Keeping in view, all above explained factors. Prices
should be fixed. In context of Innocent drinks, managers should analyse the
bargaining power of customers, availability of substitutes, taste and preferences of
customers, etc. before fixing the prices for their product.
 Incremental profit: Above factor was for customers, now this factors is considered
keeping in view of producer. The prices should be set keeping in view all types of
cost incurred and also the opportunity cost, so that reasonable profit can be generated
out of that transaction (Malina, 2017). Every cost incurred by Innocent drinks in the
process of production, promotion, transportation or any activity should be kept in
mind, and also, if any opportunity cost is there, that also should be considered.
 Objective and constraints function: This factor is related to options available at a
point of time, and what is the objective that needs to be achieved at that point of time.
Both the things should be considered and than the price setting should be done. For
instance, if there is a choice with the company that they can choose only one
supermarket to sell their products to ultimate consumers, than their objective is to sell
their product at possible maximum profit and constraint is that they can choose only
one supermarket, therefore, they should choose that place, which offers maximum
contract price.
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P2. Methods of management accounting reporting
As much application of management accounting systems is necessary, it is equally
important to convey results of these systems to managers. The information is conveyed in form
of written detailed statements and these statements are known as management accounting reports
(Phan, Bairdand and Su, 2017). These reports helps managers to take administrative decisions.
Some of the reports are explained below: Budget report: These reports consist information about budgets of all departments and
the result of variances as well, which helps managers to see what gone wrong which
resulted in variance in actual and budgeted figures. Managers of Innocent drink can use
this these reports to analyse the over/under budgeted departments and than they can
decide future course of actions for those specific departments. Inventory management report: This report consists of each and every detail related to
inventory of an organisation such as, quantity purchased at what price, what quantity has
been used, storage cost, carrying cost, ordering cost, economic order quantity, etc.
Innocent drink can use this report to determine information about costs relating to
manufacturing, transportation, storage etc., this will help then to decide about cost cutting
if required. Performance report: This report can be divided into two categories that are- reviewing
performance of company as a whole and reviewing performance of each employer
separately. This review is generally done at the end of a fixed period of time. This report
also help in reviewing financial performance of the company. Innocent drinks can use
this report to see whether the performance of the company and also the employees is
according to the expectations, and if not, than what are the factors that caused that lag in
performance.
 Accounts receivable ageing report: This report relates to credit extended by the business.
This statement includes data about debtors, date of transaction, amount blocked in credit.
This report also specify data about time period extended for credit facility (such as 30
days, 60 days) which is in accordance of credit policy of business. Innocent drink can use
this report to evaluate their credit policy and also can regulate their recovery system.
Other managerial reports are cost accounting report, order information report, competitor's
analysis reports, etc., these reports are also necessary for growth and success of a business.
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Integration of management accounting system and reports
Managerial reports are the written detailed statements of the management accounting
systems. This reporting is necessary to provide managers with required information which assist
them to take administrative decisions like inventory management policies, finance managers to
formulate policies about budgets (Shichkov, 2018). Managers further use this informations to
advice top level management to formulate strategies so that any lag in the whole specified period
can be corrected. This integration of management accounting system and management
accounting reports leads to success of business.
TASK 2
P3 Techniques of cost analysis
Marginal costing: This is a costing technique used to determine relationship between
volume produced and the cost incurred in that production. Marginal cost can be defined as the
additional cost of producing an additional unit (Johansson and Kriström, 2018).
Absorption costing: This costing technique refers to process of capturing all
manufacturing costs incurred and than allocating these costs over all units produced. These
captured costs can be direct and indirect as well.
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Interpretation of data:
According to above calculations in income statements, following interpretation can be
obtained:
According to marginal costing, net profits for the month of April is £13000 and for the
month of May, net profits comes out to be £22000. increase in profits in May is because of the
increase in sales. On the contrary, under Absorption costing, net profits for given period of time
is of £19000 and £25000. the difference of net profits for same period under two techniques
arises due to the different treatment of fixed and variable costs in process of preparing of income
statements.
TASK 3
P4 Planning tools used for budgetary controlling
Budgetary control is a means of control in which the actual results are compared with the
budgeted results. It helps management in taking appropriate actions for the deviations between
the two. Budgetary control involves the use of budget and budgetary reports, throughout the
period to co-ordinate, evaluate and control day-to-day operations in accordance with the goals
specified by the budget (Williamson, 2016). It is a continuous process which helps in planning
and coordination. Management of Innocent Drinks can use following techniques for budgetary
control:
Cash Budget
Cash budget is an estimation of anticipated cash receipts and cash disbursement for the
budgeted period. In other words, a cash budget is an estimated projection of the company's cash
position in the future. Management of Innocent Drinks Limited can use this information to
determine if the company has sufficient cash to operate in budget period.
 Advantages – It is easier to understand by any stakeholder. It improves the resource
allocation and helps management in fixing responsibility.
 Disadvantages – Cash budget is based on the past observations of a company for an
uncertain future. It is prepared by the managers on their instincts rather than facts. Thus,
it is not free from personal bias of the managers. Also, non-financial factors which have
a huge effect on finances of a business are completely omitted.
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Capital Budgeting
Capital Budgeting technique is largely used for long-term investment opportunities. It is a
process by which a company decides whether it should invest in a project or not (Schönbohm
and Zahn, 2016). Construction of a new factory or purchasing a new plant & machinery are two
examples which require capital budgeting. Capital investments are necessary for the growth of
the company but they involve large inflow and outflow of money. Various methods like payback
period, net present value, internal rate of return, etc. are used by management to decide the best
alternative out of options available. Tools of capital budgeting used by management of Innocent
drinks limited can help them avert future risk and unnecessary expenses.
 Advantages – It helps a company to estimate which investment option would yield them
best possible returns. It reduces the risk of unnecessary wastage of financial resources.
 Disadvantages – These techniques are based on estimations and assumptions about the
future which is uncertain. Any wrong decision can affect the financial and operating
health of the business.
Variance Analysis
In this analysis, a budget is prepared for each department. Then, a comparison is drawn
between actual accounting and budgeted estimated figures. The differences so found are called
variances. This technique helps in reducing cost (Budgets and budgetary control, 2020). These
variances can be favourable or unfavourable. Using this technique, management of Innocent
Drinks Limited will also be able to decide the deviations of each department individually to
initiate the corrective action.
 Advantages – Material variances drawn out of analysis helps the management to identify
the areas of improvement. It also help fixing the responsibility on particular department
which lagged behind the target. Disadvantages – Preparing budgets for each individual department is costly. Therefore, it
is not feasible for small businesses. Also, this analysis takes a long time to determine the
deviations as it is based on comparison of estimated figures with actual results. Actual
results are released after a period and thus, corrective actions also get delayed.
Planning tools used in budgetary control
Planning tools are used by managers to prepare to predict various informations that can
help them run business effectively. They prepare various budgets, analysis, trends and forecasts.
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For example, Innocent Drinks Limited used cash budget, variance analysis and capital budgeting
techniques above to forecast financial values and to check the feasibility of proposed
investments.
TASK 4
P5 Management Accounting System
Financial Problems
Every business needs financial stability to achieve its objectives. Businesses plan out in
advance several budgets and policies to estimate smooth operations of activities. But the business
environment is unpredictable and the businesses faces several types of financial problems
(Shapiro and Hanouna, 2019). Following are some of the financial problems faced by two
organisations namely, Innocent Drinks limited and Smoothie King limited:
Inconsistent cash flow – Businesses are in perpetual need of cash to carry out its daily
operations. Thus, a consistent cash flow is always a top priority for company. Companies often
face inconsistent sales and other revenues yet always has some fixed and some variable payouts.
This creates cash deficit position for company.
Unnecessary expenditure – Companies in order to attract more consumers and be at par
with their competitors, often find themselves splurging unnecessarily on advertisement, fancy
assets, etc. which only results in debts and overheads for them (Ghauri, Grønhaug and Strange,
2020). Sometimes, company incurs unforeseen expenditures which also worsen their financial
health.
Accounting Techniques
 Benchmarking – It is the process of comparing a firm's performance criteria and
business process to other businesses within their industry. This technique helps in
identifying areas and divisions which require management attention.
 Key Performance Indicators (KPI) – These are measures that are used to evaluate the
success of a company in relation to a specified goal. KPIs have two aspects – financial
and non-financial. Financial aspects include net profit, sales growth, current ratio, etc.
Non-financial aspects includes factors such customer satisfaction, employee satisfaction,
company profile, etc.
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Basis for
comparison
Innocent Drinks Limited Smoothie King Limited
Financial Issue Inconsistent sales revenue in the existing
outlets is the biggest issue for the company. It
has resulted in stunted growth of the company.
Smoothie King had introduced
new outlets which had
increased their operational
cost. The outlets are not yet
profitable. This has declined
their profit margin.
Techniques to
recognise issue
Benchmarking technique helped Innocent
Drinks limited identify the reason of decline
in sales. It also paved way for correction and
control by management.
Financial Key performance
indicators were used to assess
causes of financial strain.
Management
Accounting
System
Price optimisation technique – this technique
determines the most effective pricing of
product based on customer feedback and
Job costing system – it is the
process of assigning the costs
to incur a specific job the
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Illustration 1: 5 marketing key performance indicators you need to
track, 2020

market analysis. Market analysis found out
that at some outlets sales were decreasing
because of better priced products available
from competitor. At such locations, company
implemented differential pricing strategy to
regain customers.
business is involved with.
Company measured costs of
each particular job to identify
the areas where they can
increase profitability.
Management accounting system to solve financial problems:
An effective management accounting system reaches into all departments of a business:
finance, IT, marketing, human resources, operational and sales. An effective system helps
management identify the stress areas and then formulate required strategies and policies to
overcome those financial strains (Guinea, 2016). Ultimate aim is to increase business
profitability and to ensure its sustainable growth. For it, managers evaluate multiple techniques
and their impacts to decide the correct technique to be used. As in the above comparison,
management applied price optimisation technique and job costing system to solve the financial
issues their companies were facing.
Planning tools to solve financial problems:
The purpose of budgetary planning is to mitigate the risk that an organisation's financial
results are expecting (Jannesson and Nilsson, 2020). Planning tools are instrumental in helping
organisations take corrective actions that help company solve financial issues, it is facing. There
are various planning tools that a company can use for example, responsibility accounting,
adjustment of funds, zero based budgeting, etc. Management of Innocent Drinks Limited found
the preparation of variance analysis, capital budgeting and cash budget useful to achieve its
financial objectives. Planning tools of budgetary control enhances co-ordination, planning and
control in an organisation, because of these benefits, financial problems can easily be solved.
CONCLUSION
As per the above report, it can be concluded that management accounting is beneficial for
financial planning as well as financial well being of the company. It aims and ensures regular
profitability as well as sustainable business growth. The report presented various management
accounting systems and different methods used for reporting. The report walks through the
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budgetary control process and also threw light on planning tools used for budgetary control. Last
part of the report focused on the financial issues faced by management and various managerial
accounting techniques that can be used for solving those issues.
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REFERENCES
Books and Journals
Bobryshev, A.N. and et.al., 2015. The concept of management accounting in crisis conditions.
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Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
Ghasemi, R. and et.al., 2016. The mediating effect of management accounting system on the
relationship between competition and managerial performance. International Journal of
Accounting and Information Management.
Guinea, F.A., 2016. Study regarding the creative accounting techniques in management
accounting. The Audit Financiar journal. 14(142). pp.1136-1136.
Ghauri, P., Grønhaug, K. and Strange, R., 2020. Research methods in business studies.
Cambridge University Press.
Jannesson, E. and Nilsson, F., 2020. Planning for control and evaluation. In Strategic
Management Control (pp. 45-66). Springer, Cham.
Johansson, P.O. and Kriström, B., 2018. Cost–Benefit Analysis. Cambridge University Press.
Kostyukova, E.I. and et.al., 2018. Improvement cost management system for management
accounting. Research Journal of Pharmaceutical, Biological and Chemical Sciences.
9(2). pp.775-779.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Malina, M.A. ed., 2017. Advances in management accounting. Emerald Group Publishing.
Phan, T.N., Baird, K. and Su, S., 2017. The use and effectiveness of environmental management
accounting. Australasian Journal of Environmental Management. 24(4). pp.355-374.
Schönbohm, A. and Zahn, A., 2016. Reflective and cognitive perspectives on international
capital budgeting. critical perspectives on international business.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Shichkov, A.N., 2018. Tools of the management of an accounting system. Scientific Israel-
Technological Advantages. 20(4). pp.31-44.
Williamson, D., 2016. Budgeting and Budgetary Control. Lulu Press, Inc.
Online
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through:<https://www.henryharvin.com/blog/budgets-and-budgetary-controls/>
5 marketing key performance indicators you need to track. 2020. [Online]. Available
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indicators-you-need-to-track>
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