Management Accounting and Essential Requirements of Different Types of Management Accounting Systems

This document provides an introduction to management accounting and its essential requirements. It discusses different types of management accounting systems and methods used for management accounting reporting. It also covers the calculation of cost using marginal and absorption costing system.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
LO1..................................................................................................................................................3
P1 Management accounting and essential requirements of different types of management
accounting systems.................................................................................................................3
P2 Different methods used for management accounting reporting........................................8
LO2................................................................................................................................................10
P3 Calculating cost using marginal and absorption costing system.....................................10
LO3................................................................................................................................................13
P4 Advantages and disadvantages of different types of planning tools used in budgetary
control...................................................................................................................................13
LO4................................................................................................................................................16
P5 Adapting management accounting systems responding to financial problems...............16
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19

INTRODUCTION
Management accounting is the process of analyzing various business activities that
provide information related to stakeholders and regulators that are working in the organization.
Accounting plays an important role for the success in business for gaining more opportunity as
well as profitability (Maas, Schaltegger and Crutzen, 2016). It help in providing various benefits
such as planning, taking decision, managing business in strategic form and identifying problems
that influence company’s operation. Present study based on Advanced Engine Research Ltd. that
is providing an auto racing engine manufactured in Basildon, Essex, England. It was established
in 1997.
Report emphasized on meaning of management accounting and its essential requirement
that help in fulfilling business objectives. It also includes different types of management
accounting systems. It also includes different methods used for management accounting
reporting. It includes analysis of different cost that help in preparing income statement by using
marginal and absorption cost. Furthermore, it includes advantages and disadvantages of different
types of planning tools used in budgetary control. It also emphasize on adapting management
accounting system that help in responding to financial problems.
LO1
P1 Management accounting and essential requirements of different types of management
accounting systems
Management accounting is also known as managerial accounting that will be used for
analyzing cost of business and operations that help in preparing financial report, records and that
aid in taking decision for the company. It also helps in preparing internal financial report and
records and enhancing in achieving goals of the company. On the other hand, management
accounting include doing interpretation, identification, analysis of accounting information that
has been obtained with the help of financial accounting (Chenhall and Moers, 2015). It helps

business managers in the formation of policies, in daily operations of the firms and making
decision by classifying important factors affecting the business. Effective managers are required
for effective management accounts so the effective utilization of the resources could be done
along with minimization of risk. In effective management all the resources should be allocated
well so that nothing goes on vain and all deviations and errors could be well defined and could
be controlled effectively. There are different benefits of managerial accounting such as planning,
decision making, identifying early signs of problems and strategic management. Profitability is
another concept that evaluates different aspects for gaining financial gains in the future. Break
even analysis is another segment that provide effective use of resources.
Management accounting also helps management in conducting planning for whole
business by offering different types of reports that helps to estimate the impact of alternative
actions on the ability of firm to attain its objectives.
The purpose of management accounting is that it helps companies to improve their ability
to control the level of expenses and also helps to conduct planning for the future with the help of
financial forecasts. It also focuses on analysis to evaluate where the firm is having gaps etc.
Management accounting is essential for business because:
 Measurement of performance: - It helps in measuring performance of employees and
efficiency in the organization. This process include comparison between actual
performance with the standardized performance that help in setting deviations that is
necessary steps can be taken and implemented.
 Assessment of risk:- Another essential requirement of accounting management is that it
help in identifying risk factors that is in enterprise can be minimized through effective
management strategy that will be followed by advanced engine research limited company
for manufacturing engines.
 Allocation of resources: - Organizations becomes able to achieve efficient and effective
utilization of resources that help in allocation of resources to the various aspects that will
be enhancing changes in creating enterprise that is helpful for collecting information and

data (van Helden and Uddin, 2016). For example: Advanced research engine uses
effective use of resources that help in building various aspects for the future.
 Financial statement presentation: - It is also an essential requirement that help in
providing proper presentation of financial position in the enterprise. It is important for
providing various aspects that help in providing changes that evaluate effective use of
resources that help in accepting challenges in creating changes for the future.
Basis Management accounting Financial accounting
Meaning It refers to the process of
developing management
accounts and reports that offer
accurate statistical
information.
It helps to maintain track of
financial transactions.
Application It helps management to take
meaningful strategies and steps
(Maas, Schaltegger and
Crutzen, 2016).
It is prepared to reflect fair
picture and accuracy of
financial transactions.
Scope Scope is broader Scope is not as much as
management accounting
Measuring grid Qualitative and Quantitative
both
Quantitative
There are different types of management accounting system as follows:-
Cost accounting system: - This is another method of evaluating cost that enhance
profitability as well as help in controlling cost of the product. This will be further divided into

job order costing and process costing. Both of these help in cooperation and participation of
executives required that used in various departments.
 Job costing system: - This help in identifying manufacturing cost that provide various
aspects in enhancing valuation of job. It provides standardized actions that create change
in providing different aspects that help in evaluation of cost as well as enhancing expense
that provide effective changes in costing.
 Process costing – It is the method of providing costs to the units of production in firms
that are produced in large quantities of similar products.
Inventory management system: - In this type of system that will be concerned that help in
evaluating different aspects that bring change in non-capitalized assets of the enterprise. It refers
to the combination of procedures and processes that looks at maintenance and monitoring of
stocked products whether, the output are raw material, finished products that are ready to deliver
to consumers. It is the combination of technology and procedure that look at the maintenance and
monitoring of the products, whether those goods are raw material, finished goods etc. There are
various types of inventory management reports like cycle count variance weekly report,
dedicated locations' usage report etc.
 Inventory valuation refers to the cost related with the inventory of company at the end of
the reporting period. It is an important part of valuing cost of goods sold. It can be valued
by different methods.
 Under LIFO method, items produced at last are sold first. It assumes that the recently
manufactured or purchased items are sold first to the customers. When price of goods
increases, cost of goods sold as per LIFO is much higher.
 Under FIFO method, the items are recorded as to be sold first. Cost related with
inventory that was buy first is the cost expenses first. Under this approach, it is assumed
that stock is sold to customers in order in which they are purchased or manufactured. It is
mostly used by firms because organisations typically offer products in order in which
they purchased.

 Under AVCO method, the inventory is valued at the weighted average cost of all the
purchases. This approach is mainly used when the company does not have much
deviation in its stock.
 Company should use First in first out method for valuation of inventory because no
manipulation of income is possible and the amount of inventory in balance sheet is likely
to approximate the current market value.
 There are various types of reports under inventory valuation method. Such as inventory
control report, inventory forecasting report, ABC analysis report etc. To prepare
inventory contyrol report, firm may use methods like stock book, bar codes etc. To
develop overall inventory performance report company uses metrics like inventory
turnover etc.
Benefits of management accounting.
There are various benefits such as planning, controlling, providing services to customers.
Coordinating is another aspect that helps to evaluate changes that provide effective use of
resources. It is also important for improving efficiency that provides changes in getting into
various aspects that will be useful for the future (Ax and Greve, 2017). It help in improving
various perspective that enhance business for evaluating changes and providing communication
that enhance different aspects and improvement is being done for providing changes that create
evaluation in providing motivation to employees and evaluating different aspects that provide
changes in accepting in evaluation of accounting and communication will be enhanced for
bringing effective evaluation of resources that will be providing in evaluating cost in accounting.
It plays an important role in evaluating changes that create effective use of resources and
enhancing management accounting for achieving goals of business. There are various aspects
that involved in providing changes that help in providing effective use in enhancing business for
providing strategic use in business. This provides change in business aspects and evaluate
differences in completing changes for managing business.

P2 Different methods used for management accounting reporting.
There are various management accounting reports that help in managing reports that counts
on providing forecast for making critical business decisions. There are different available sources
that provide reliable and accurate statistical and financial information. Different reports prepared
by the management that help in benefiting advanced research engine in are as follows:-
 Budgeting report:- Budgeting reports sets out the plan to analyze the company
performance and bringing evaluation that will be depended on for improving
performance and enhancing changes that provide effective change in business operations
and bringing out incentives for the future. It helps to determine the cost that needed for
completing project and evaluating effective use of resources that improves business
operations (Shields, 2015). Forecasting budget for the future hat help in evaluating
various objectives for bringing change in evaluating various aspects in business.
Therefore, this system help in developing objectives that evaluate aspects and bringing
changes for development of reports in business.
 Accounts receivable report:- This is another type of report that is concerned while
managing accounts receivable for companies that are engaged in extending credits that is
given to customer. It is important for improving efficiency that is required for completing
various aspects that will be helpful for the future course of action. This type of report
helps to remove old bad debts and maintaining liquidity of the company. It helps in
improving problems that associated with company’s collection process. The report is
important because it helps company to understand outstanding debtors and their quality.
 Job cost reports:- It is concerned with identifying cost, profitability and expenses of
particular job. This can be made about the earning aspect of the projects that help in
evaluating profitability and productivity of business that provide enhancement of
activities that help in reducing efforts or less profitable in various activities. It helps firm
to evaluate the changes that helps to determine various steps that are required for gaining
productivity and enhancing business for the future. It also helps in evaluating cost that
needed for completing project. It is important because it provides important details

regarding current state of job and helps to understand how project will be completed from
perspective of cost and revenue.
 Performance reports: - This help in identifying differences calculated comparison
between actual results and estimated results and information regarding reports that are
presented in performance reports. These reports are generally prepared on monthly and
quarterly basis. It helps to improve customer insights by focusing on the opportunities of
best sales. Employees are able to understand needs of clients.
 Order information report: - It is providing information related to see the trends in
business effectively and efficiently. Through this it help in integrating management
operations that help in achieving low cost on placing of orders and their management.
 Business situation or opportunity reports: - This is prepared for management so that
they can be well aware of occurrence of a particular event. By using this report that help
in evaluating different changes that will be important in taking important business
decisions in regard to events and their understanding for the future perspective. It helps to
make changes in the strategies of business as per the situation.
 Inventory and manufacturing reports: - Companies involved in manufacturing
processes and preparing different aspects that will be evaluating in managing various
changes that will be providing evaluating manufacturing and inventory process can
become more efficient (Wagenhofer, 2016). These reports providing labor cost, per unit
overhead cost and wastages that help in managing all task for the future. Therefore, all
these methods help in evaluating cost that needed for continuing business for the future
course of action. All these cost help in evaluating changes that will be needed for gaining
various perspective. By using different techniques in business that create evaluation of
business that changes in business operations. From all these changes that create different
aspects in providing aspects that help in bringing change that enhance operations in
business. It helps to manage different inputs that are essential to manufacture the products
for customers.

LO2
P3 Calculating cost using marginal and absorption costing system.
Absorption costing-
It is a method of accounting that provides full cost of manufacturing a product or service.
It not only includes cost of labor and material but also include all manufacturing overheads.
Marginal costing-
It is the system in which variable nature cost is charged to unit of cost and fixed cost of
the period is written off completely against the total contribution. Variable cost is treated as cost
of the product.
ABC analysis-
In management of inventory, ABC analysis is a technique for inventory categorization. It
divides inventory into three categories like A, B and C.
Standard costing-
It is a type of accounting system that is used by manufacturers to determine the variance
between cost that should be happened for actual products and actual cost of the goods that were
produced.
For example: company manufactures and sells product on the basis of following aspects:
Particulars Price per unit in £
Selling price 50
Material 8
Labor 5
Variable production overhead 3
Profitability statement as per absorption costing method is enumerated below:

Particulars May (in £) May(in £) June(in £) June(in £)
Sales revenue 15000 25000
Less: cost of
goods sold
Inventory in the
beginning of
period
0 5200
Add:
Production /
Purchase
1300 9880
Less: Ending
stock
(5200) (7800) (2080) (13000)
Fixed production
overhead
(under) or over
1000 (200)
GP 8200 11800
Less:
expenditures
Sales
commission
(variable)
750 1250
Adm. Overhead
(fixed)
2000 2000
Selling &
Distribution
4000 (6750) 4000 (7250)

overhead (fixed)
Net profit 1450 4550
Marginal costing method
Particulars May (in £) May(in £) June(in £) June(in £)
Sales revenue 15000 25000
Less: variable
expenditure
Opening stock 0 3200
Add: purchase 8000 6080
Less: closing
stock
(3200) (4800) (1280) (8000)
Commission on
sales
(750) (1250)
Contribution
(Sales – variable
expenses)
9450 15750
Less: fixed
expenditure
Production 4000 4000
Adm. 2000 2000
Selling & dist. 4000 (10000) 4000 (10000)

Profit 550 5750
The above depicted evaluation shows that absorption costing method presents suitable
view of cost and profitability aspects. In the case of absorption costing method, profitability, for
the month of May and June, accounts for £1450 & £4550 respectively. On the other side, in the
case of marginal method, profit accounts for £550 & £5750 significantly. Referring all such
aspects, it can be stated that firm should follow absorption method over marginal. Moreover,
absorption costing method presents profitability by taking into account both fixed and variable
production expenses while determining gross profitability.
LO3
P4 Advantages and disadvantages of different types of planning tools used in budgetary control.
Budgetary control refers to the tool that is used for selling and promoting products and
services for doing coordination between departments and motivating managers and to evaluate
performance. This plan help in identifying all aspects of advanced research engine to ensure
organizational achieve its objectives in a given period (Nielsen, Mitchell and Nørreklit, 2015).
There are different departments in the company that help in managing and coordinating budgeted
goals. On the other hand, budgetary reports evaluates performance and sorting different aspects
that provide changes in business operations as operating promotion and incentives enhanced by
the company for changing this aspect for the future. From the above changes that have been
taken place for evaluating plan that is going to be expected for the future.
Advantages and disadvantages of Budgets
Coordinating all activities of business of various departments that help in evaluating
changes that create effectiveness in business. On the other hand, there are various problem that
occurred in evaluating changes for providing rigid change in business. It help in translating
strategic plans that provide effective change in business operations and provide revenues for
gaining changes that provide effective use of resources. In contrary, budget provides
demotivation to employees and that lead to bring lack of participation in business. It provides
excellent record of organizational activities and improving communication with employees. It

provide resource allocation and due to rigid budget structure that enhance business initiatives and
innovation at lower levels for obtaining different ideas and concepts.
Types of budgets.
Sales budget-
It is an estimate of total volume of products or services that a firm proposes to sell in
future. It is generally made for the following year. Mostly sales budget include quarterly and
monthly figures as well.
 Benefit- It helps in better allocation of the resources for all types of departments based on
sales plan and other factors.
 It also helps to set the target for sales team and assist firm to attain targets that helps firm
to grow economically.
 Limitation- Preparing, reworking, and editing the sales budget can take much time of
management.
 Another limitation is that it requires time to prepare purchase budget properly.
 It is not 100 % correct because no one can predict future events fully.
Purchase Budget-
It refers to the budget that contains the value of inventory that organization should
purchase during each budget period.
 Advantage- It helps firm to ensure that sufficient stock is available in hand to meet out
orders to clients for products.
 It helps firm to exercise greater control over level of inventory.
 Disadvantage- It is very time consuming to develop purchase budget. If department is
not able to achieve budgeted results then, departmental manager will blame other
departments.

Advantages and disadvantages of cost volume profit analysis
Calculation that is being set up a standard of formulas that will be added into business for
the future course of action. In contrary, it assumes that cost are fixed however mixed cost
changes with change in production. It helps managers in deciding estimate future spending that
affect objective of the business. On the other hand, sales remain constant but demand change
over time for gaining profitability as well as productivity in the future (Thomas, 2016). It help
manager decide on the price of product and identifying highest and lowest price that offer in
relation to the competition. From the above changes that will be taken place for providing
effective change in business operations. While evaluating cost volume profit only specified
period is being provided that are unreliable for adopting changes in business operations.
Advantages and disadvantages of pricing strategies
Customer base pricing provide target to consumers that will be paying for the product and
enhance business for the future course of action. In this cost that will be based allows
management as providing effective use of resources and considering pricing strategies for
evaluating changes that will be accepting cost and gross margins in business. For the purpose of
evaluating price it is important for enhancing changes that create various aspects that build
changes and evaluating various aspects that bring efficiency and effectiveness for conducting
effective use of resources. As there are different changes that will be providing for developing
changes in the future course of action. Demanding prices for the future provide optimize
management prices and provide loss of profits by not taking price of various changes that help in
evaluating price that enhance business (Alsharari, Dixon and Youssef, 2015). Penetration pricing
is being provided for evaluating various changes that create effective use of resources that
enhance business operations. It helps in providing prices lower than profit and provide customers
to buy product that help in enhancing business operations.
Use of different planning tools and its application for preparing and forecasting budgets.
These tools help in providing various aspects that help in gaining changes as various
changes occur for the purpose of achieving goals of business. There are different changes that
will be occurred in gaining different tools that enhance business for the future course of action
and evaluating changes that may create forecasting of business. It is important for evaluating

different aspect that enhances business operations. For the purpose of evaluating planning tools
that can be help in gaining changes that will be provide effective change in business for the
future aspects and through these tools. From different perspective that has been provided for
bringing changes in helping out different aspects for providing tool in calculating tools. It is
important for providing these tools help in changes that make sense for the purpose of changing
different scenario.
For the purpose of changing business scenario and help in getting more involved in business
for evaluating changes by adopting this chance for building effective tools and bringing out tools
that evaluate designing of segments and involving challenges that enhance business operations
for providing various changes that help in bringing out changes that enhance business for
evaluating various aspects that enhance business and there are different changes that help in
providing changes that enhance business operations for the future. As there are various aspects
that enhance business operations for the future. It is important in evaluating changes that provide
evaluating differ in enhancing business operations.
LO4
P5 Adapting management accounting systems responding to financial problems.
Activity Based costing-
It is a method of management accounting that tracks the cost of overheads to the
activities and then assigns them to different objects. It is a method to allocate overhead cost,
indirect cost to departments and goods that generate these cost during production. The method
also help to allocate indirect cost into direct cost as compared with conventional costing. Firstly,
it recognizes the relationship between overhead activities, costs and manufactured goods. Then,
it assigns overheads cost to the goods less arbitrarily as compared with traditional costing
methods.
Key performance indicators-
It refers to the type of measure that helps companies to measure and evaluate the
performance of the company against some strategic objectives. It helps to minimize the

complexity related with the performance tracking by minimizing large amount of measures into
some key indicators.
Balance score card-
It is defined as the strategy performance management tool or it is a semi standard
structure of the report that can be utilized by management to track the implementation of
different activities by staff within their control (The Balanced Scorecard—Measures that Drive
Performance, 2019). There are four perspectives of balance scorecard.
Finance perspective-
Customer perspective -
Internal business process perspective-
Learning and growth perspective-
Financial governance-
It refers to the way firm manages, collects, monitors and controls the financial nature
information. It also involves the way in which management tracks the financial transactions and
control data, manages performance, operations, compliance and disclosures.
For the purpose of bringing out changes that provide in creating performance indicators that
provide effective use of resources in the organization. It is important for extracting data and
information for fulfilling desired objectives of the advanced research engine. By applying
different aspects that enhance business for the future course. It is important for understanding
concept that help in fulfilling getting changes that create difference and enhance business
operations. For analyzing performance of business various aspects that provide change in ratios
that lead to change in liquidity ratios and different ratios that provide financial performance of
the organization. It has lead down that enhance operations for enabling changes that enhance
business that convert changes that lead to provide satisfaction to customer and bringing changes
that enable in maintaining future business that converted it for enhancing operations in business.
For the purpose of implementing changes that create effective use in resources and
enhancing human resource management environment businesses for viewing staff that are doing
work in the company. As there are different changes that occurred for providing effective

implementation of service quality and revenue that earned from doing business effectively and
efficiently. There are different aspects that provide change in business operations and bringing
changes for the future. It is essential for bringing up effective utilization of resources that enable
in developing strategic and sustainable goals that help in developing policies and procedures that
are implemented. For the future development in business operations for providing changing in
different aspect that will be enhancing business operations. For completing changes that enhance
business operations for providing effective change in business operations. It use in decision
making process and enhancing development strategy that allow reporting for the future (Taylor
and Scapens, 2016). This lead in development for efficient reports that provide information
regarding production as well as understanding pricing and strategic planning. In management
accounting managers will support the strategies and goals of the organization. The integration of
sustainable matters into various decision-making processes are helped by management
accounting tools and techniques like marginal costing , standard costing , break even analysis
etc. It helps in the process of production of reports which have information of sustainable
impacts help in understanding price and budget decision and strategic planning.
CONCLUSION
From the above study it can be concluded that management accounting plays an important
role that help in creating various aspects for providing an opportunity to enhance business for the
future course of action. It is an essential part that create change in business planning and
enhancing future perspective for understanding pricing budgeting decisions and making strategic
planning. For the purpose of developing reporting strategy that provide financial as well as non-
financial information that cater business needs. There are different planning tools that help in
evaluating budgetary control in business. Integrating business operations lead in emphasizing
opportunities that enhance business for earning profitability.

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