Management Accounting and its Types

This article provides an overview of management accounting and its types, including price optimization system, inventory management system, cost accounting system, and job costing system. It explains how these systems are used in a civil engineering company and the benefits they offer. The article also discusses the different reports produced by management accounting and their importance in decision-making. Additionally, it covers the methods of costing used to prepare income statements and the advantages and disadvantages of budgetary control's planning tools.

MANAGEMENT
ACCOUNTING

INTRODUCTION
The MA is a systematic process of managing the qualitative and quantitative data in form
of reports (Marr and Gray, 2012). The main purpose of this accounting system is to helping
companies in taking crucial decisions and making effective plans by providing a suitable
framework. Eventually, it is not essential for the organisations in compare to financial
accounting system. To understand about MA, a civil engineering company “O'Keefe
construction limited.” is selected. The organisation is located in London, UK and provides the
civil engineering services to their clients. Along with in the project report, understanding of
MAS and MA techniques for producing the financial reports are included. As well as pros and
cons of planning tools and way sort out monetary issues by help of management accounting
systems is also mentioned.
ACTIVITY 1
PART (A)
Management accounting and its types.
This is an accounting system which is aligned with the preparation of reports including
qualitative and qualitative data. These prepared reports are being used by managers in process of
corrective steps taken about allocating resources (Prencipe, Bar-Yosef and Dekker, 2014). One
of important thing that makes this accounting different from the other accounting is that it does
not includes any particular laws and accounting concepts. Like in respective company they apply
various types of MAS and some of these are demonstrated below such as:
 Price optimisation system- It is associated to providing a suitable framework for the
purpose of setting the price of products and services. Basically, this system is needed to
companies to satisfy the customers by selling the products and services at an effective
price. Overall, it is needed for allocating prices of products as per the cost and
considering a suitable amount of profit. Herein, the aspect of above organisation they are
applying this accounting system with an objective to set the estimated price of their
construction projects. Due to this they are able to communicate about total price of their
projects with their customers.
 Inventory management system- It is associated with the process of better management
about inventories by tracing quantity of raw material and prepared products(Proctor,

2012). Apart from it, this is beneficial in managing an effective balance between the need
and offering of stock. So the inventory management system's essential requirement is that
it is useful in taking decision about purchasing of materials and it is done as per given
information by this accounting system. For example, in above respective company, they
are using this accounting system for managing resources like concrete, cement, iron etc.
of their different construction projects.
 Cost accounting system-It is related to managing and reducing the cost of various kind of
activities. Without this, it can be tough to business entities to get complete information
for cost. Like in respective company it is beneficial for them because on basis of it they
estimate the overall cost of their construction project. As well as it helps them in
controlling the cost of their projects so that they can take benefit from the construction
project.
 Job costing system- This is associated to assigning cost of job to various types activities
in an effective manner. It is suitable for manufacturing and construction industries.
Along with this system is required to the managing job cost of various activities. This
accounting system consists three kind of information such as:
Direct material- It enables to trace the cost of material during completing any task or
activity (Brock, Hinings and Powell, 2014).
Direct labour- As well as this tracks the cost of labour that occurs in a particular job.
Overhead- Apart from it, this keeps record of different kind of overheads.
In above respective company O'Keefe construction limited which is operated in construction
projects and it is beneficial for them in assigning the cost of job of various kind of activities of
construction project.
Reports of the management accounting.
Under the MA reports, information regards to financial and non financial aspects is
included that is useful for decision making process. Organisations prepare various kind of reports
for the purpose of making competitive plans and strategies as per the information provided by
these reports. Such as in above company, they produce below mentioned reports that are as
follows:
 Inventory management reports- These are kind of reports that contains information about
the available inventories in the warehouses (Ruch and Taylor, 2015). As per this report

organisations, take decisions to purchase of raw material. These reports useful for
manufacturing and construction industries. Like in above company, they produce this
report for the purpose of manage their raw material of construction. Along with on the
basis of it, they purchase new material. Eventually, without this report it will be tough to
above mentioned company because they will not be able to manage requirement and
supply of raw material. In result it may occur as a high cost of construction project.
 Cost accounting reports- These are related to providing information about cost of
different types of activities of organisation. Basically, a complete cost accounting report
consists information like cost centre, distribution of fund, summary of cost and cost
reconciliation etc. It is so because necessary information derives from this accounting
system. For example, in the above company they produce this report to get complete
information about cost of their various construction projects. It consists detailed brief of
allocation of cost in different activities, total incurred cost etc. Apart from it, this report is
also beneficial in analysing the actual profit by comparing the actual cost by standard
cost.
 Account receivable ageing report- This is related to providing information about the total
due amount by debtors which is going to be receive by the company (Serena Chiucchi,
2013). By this report, companies can find out about how much amount of money is
needed to be collected from debtors. One of the key feature of this report is that it
consists date on which credit transaction proceeded and due to this companies can
calculate the interest with ease. Herein, the above company they produce this report that
helps them in keeping record about number of debtors and amount is due by them. Along
with this report not only includes information about debtors but also it consists
information about creditors too.
 Performance report- It is a type of report that is associated with containing information
about performance of various activities and employees. By preparation of the
performance report companies can track the record of performance that may help in
further planning. Like above organisation produce this report with an objective to
evaluate and manage the performance of their engineering projects.
Advantage of various kind of management accounting systems

Below, benefits of management accounting systems are mentioned:
Management accounting
system
Benefits & Application
Price optimisation system It is associated with the process of setting price of products and
services at an effective price level. In above company, this
accounting system is applicable for them in estimating right price
of their civil projects.
Inventory management
system
It is important to keep the record in a systematic manner about
inventories which is recorded in stores. In chosen civil engineering
company, they take benefit of this accounting system in tracing
quantity of raw material like cement, concrete and many more.
Cost accounting system This is useful in managing the cost of activities. Same as in above
respective business entity it is applicable for them in minimising
and tracking the cost of their construction projects.
Job costing system As well as this accounting have its importance for getting
information about the allocated cost in various activities
(Lindholm, Laine and Suomala, 2017). For example, in above
company they eliminate cost of job by applying this accounting
system.
Management accounting system and reporting are interrelated with organisational process.
MAS and reporting are aligned with procedure of companies. It is so because activities
and functions of companies are performed by different kind of accounting systems
(Stechemesser and Guenther, 2012). Like in respective company, they use accounting systems
such costing system, job costing system, inventory management system etc. All these help them
in their construction projects. Additionally, the accounting reports provide them necessary
information. Such as performance report makes aware them about effectiveness of their project
same as cost report helps them in minimising the costs.
PART(B)
ANNEX(A)

Methods of costing to prepare the income statements: There are mainly two types of costing
techniques which are as follows:
 Absorption costing- Under this accounting technique, all types of cost mainly fixed and
variable are assigned and absorbed completely in process of producing income
statements.
 Marginal costing- It is a costing technique that is associated with producing income
statement by taking both the costs in different manner. In this, sunk cost is considered as
period cost (McVay, Kennedy and Fullerton, 2016). On the other side flexible cost is
taken as unit cost.
Question 2.
(a) Profit statements by marginal costing technique:
Income statement under marginal costing method
Particular Amount (in £)
Total sale (4500x95)
Less- Total variable expenditures
Less- Closing stock
427500
252750
21000
Contribution
Less- Fix expenditure (180000/4)
195750
45000
N.P
Working note:
Calculation of total variable expenditures-
DL- (5000 units @ £ 15 per unit)= 75000
Add: DM- (5000 units @ £ 18 per unit)= 90000
Add: Variable production expenses- (5000 units @ £ 9 per unit)= 45000
Add: Other variable charges- (@10% of 427500)= 42750
252750
Calculation of closing stock

Direct labour-(500 units @ £ 15 per unit)= 7500
Add: DM- (500 units @ £ 18 per unit)= 9000
Add: Variable production cost (500 units @ £ 9 per unit)= 4500
21000
Income statement under absorption costing technique of quarter one
Particular Amount (in £)
Total sale (4500 units @ £95 per unit)
Less: COGS
427500
189000
GP at normal
Add: Over absorption cost
238500
6800
G.P. at actual level
Less- Fixed expenditures
Less- Selling and distribution expenditure (9.5*4500)
245300
45000
42750
NP 157550
Working note:
Calculation of cost of goods sold:
V.C. = 42
Production Expenses (42*5000)= 210000
Less- Value of closing inventory (@10 % of production cost)= 21000
189000
Calculation of under absorption cost:
Particulars Amount
Each quarter standard production cost 5500
Fix production expenditure 75000
Fix production expenditure each unit 13.64
Actual expenses 68200
Absorption cost 6800

Income statement under absorption costing technique of quarter two
Particular Amount (in £)
Total sales (3000 units @ £95 per unit)
Less: COGS
285000
147000
GP at normal
Less: Under absorption cost
138000
5476
G.P. at actual level
Less- Fixed expenditures
Less- Selling and distribution expenditure
132524
45000
28500
Net profit 59024
Working note:
Calculation of cost of goods sold:
VC for each unit= 42
Opening inventory= 21000
Add- Production expenses (42*5900)= 247800
Less- Closing inventory= 121800
147000
Calculation of over absorption:
Each quarter standard
production 5500
Fix production expenditure 75000
Fix production expenditure
for each unit 13.64
Actual expenditure 80476
Absorption cost -5476

Interpretation- On the basis of above solved numerical it can be analysed that net profit
is different in each method of calculating the net profit. In the absorption costing method, the NP
is of 157550 as well as in the marginal costing method it is of 150750. Hence, it can be
interpreted that company's NP is more in compare to marginal costing method.
ANNEX (B)
Question 1.

ACTIVITY 2
PART (A)
Pros and cons budgetary control's planning tools

Budgetary control is related to ensuring communication, coordination and control of
activities within an organisation. The objective of this tool is to helping in budget forecasting. It
involves comparison of actual data with budgeted figures to analyse profitability position of a
firm. This is a procedure where budgets are prepared to meet any uncertain events expenses or
losses. A vital range of planning tools like zero-based, master, fixed, flexible budget etc. Above
company applies different kind of tool to estimate earnings & expenditure during an accounting
year.
Fixed budget: In this budget all financial activities sustain unchanged regardless of any
change in volume of output (Salterio, 2012). This remains fixed with per unit of sales generated.
It can also be defined as a master forecast which is prepared before the beginning of budget
period. The major purpose of fixed forecast is at the planning stage, when board objectives are
defined for the organisation. Above respective company makes fixed budget for kind of
expenses that are static in nature such as salary of employees, insurance charge for machinery,
property tax, depreciation & amortisation on fixed asset etc. For small organisations this acts as a
useful tool as it helps them in maintaining accurate records of products & services.
Advantages:
 This measures profit and performance of data more accurately due to which it does not
require to be maintained on a day-to-day basis. O'Keefe construction limited company
prepares fixed budget on quarterly basis as no changes are needed due to its static nature.
 It changes within the limit specified in a budget under uncertain conditions such as
sudden expenses etc. The engineering company mentioned above sets aside some part of
reserve in a separate account which can be used in case any sudden expense arises.
Disadvantages:
 The engineering company lacks flexibility in conditions where estimation of sales
volume changes and fixed budget cannot be changed due to its static nature.
 With the use of fixed budget, O'Keefe construction limited company cannot allocate
additional resources for help in emergency situations.
Variable budget: This budget is designed to flex with volume of output by considering
different cost behaviour patterns (Schaltegger,2012). This is also known as flexible budget as
this is based on a financial plan for estimating earnings and expenses related to actual amount of
output.

Above respective organisation produces makes flexible budget for long term borrowings and
expenses during the forthcoming year.
Advantages:
 Above respective organisation can adjust figures in a flexible budget as it easily adapts
to them.
 It involves communication with the members working in an organisation at every level of
management.
Disadvantages:
 Managers at O'Keefe construction limited company often manipulate the figures in the
budget as each amount varies with expenses incurred.
 In addition, another drawback of this budget is about more time consuming process.
ZBB: This is a kind of budget that starts with zero activity base for each financial year
(Songini, Gnan and Malmi, 2013). This is guide to manger by justifying each and every
expenditure to record in the books of accounts. For every accounting period, New budget is
prepared with excluding the all previous year data. Above company created this budget for
business operation that are crucial in aspect of net income and profits of the business firm. There
are some benefits and limitations are described as follows:
Advantages:
 It provides a systematic format in order to record financial transaction and managers
think from a new edge because under this all new monetary activities are including by
neglecting past budgets' performance.
 It allows allocation of the business resources effectively. O'Keefe construction limited
aligns it with their activities in order to optimum utilisation of material and expenditure in
particular project.
Disadvantages:
 It is time consuming concepts and complex to manage all business process with no uses
of previous data requires more time and efforts to handle.
 It does not provide information regarding the business performance of previous years.
Zero budget costing is a complicated process that requires good knowledge.
Master budget: There are different kind of budgets that are generated in business and
master budget is the collection of all budget (Myers, 2013). It requires all the information

regarding sales, production, estimated expenses and income as well as profitability of business.
In relation to above chosen business entity this can be assessed that their managers makes this
budget to keep a summary of all the business financial projected. There are some benefits and
drawbacks of its in relation to companies such as :
Advantages:
 It is a broad information of business including all the budget that prepared in the
company.
 By using this budget business entities become able to unveil the business goals, strategies
and organisation activity regarding sales, profit, costs and expenses.
Disadvantage:
 It comprises all the business information of every budgets so it creates problem to
internal management to analyse proceedings records in detail.
 Implementing the definite assumptions on the process may prove correct.
Various planning tools in preparation of budgets.
The different kind planning techniques that are used in budgetary control, are compulsory
for estimating budgets accurately (Clinton and White, 2012). All the business operational
information and gathered data are required for generating the budget to determining the business
effectiveness. That's why the management of O'Keefe construction limited uses assorted
planning techniques like fixed budget, master budget and ZBB for taking corrective actions.
ANNEX(C)

PART(B)
Variation of ways to resolve monetary issues by MAS.

In the businesses, there can be any kind of monetary issue that may arise due to
inefficiency of activities and functions (Houghton, 2013). Thus, it is essential for companies to
sort these problems in less time before it impacts on their performance. Most of the business
entities implements MAS in order to solve problems regards to monetary aspects. Eventually,
these problems can be defined as a condition in that companies face the problem lower financial
resources to complete day to day activities. Some common monetary issues are described below :
 Spending more than income- It is related to a problem that arises when company's
earning decreases continuously in relation to income.
 Lower sales- It is a kind of problem in that sale products and services decreases. The
reason behind this issue is that lack of effective pricing strategies. Due to this revenue
decreases along with low sales.
Techniques to deduct the financial issue: This is compulsory for businesses to find out actual
financial issue so that strategies can be made accordingly. Herein, below some techniques to find
out the issue are mentioned:
 Ratio analysis- This is linked with calculating & analysing the various ratios which are
linked with the financial performance of company (Bradbard, Alvis and Morris, 2014).
This contains ratios such as gross profit ratio, efficiency ratio etc. As per this,
organisations can check actual financial issue.
 Key performance indicator- This is a type of method that is associated with analysis of
profitable and non profitable activities. On the basis of it, organisations can evaluate the
financial problems in which they are need to do improvement. Along with it helps in
identifying the issue of lower profitability.
Financial governance- This is a way of managing the activities and functions of monetary aspects
in a systematic format. It is so because it collects, analyse and manage the financial transaction
so that decision can be taken on the financial issues.
Apart from it, the financial governance also can be implemented in business operations
and activities as a method of tracking variances in actual and standard outputs. This is why
because it includes detailed information about the financial records of the company.
Difference between two companies:
Basis of
difference
O'Keefe construction ltd Well done construction ltd

Financial
problem
Their monetary error is of more
expenditures in compare to earnings.
Due to this, their managers do not
have enough monetary sources in
order to perform their other activities
because finance is key for operating
all the activities.
The well done construction limited
company's monetary problem is
regards to decreasing the total
revenue because of lower quantity of
selling units. This issue is effecting
them negatively because they are not
able to have enough liquidity for
meeting the requirement of working
capital.
Accounting
system
As per mentioned monetary issue, the
organisation is needed to implement
the cost accounting system. This is
why because it can help them in
minimising the expenditures as much
as possible. So their financial issue
will be resolve by this accounting
system. As well as they use the ratio
analysis technique to find out the
exact issue.
As accordance of financial issue, the
company required to implement an
effective accounting system and that
is price optimisation system. This is
so because it helps them in
determination of price at an effective
level. If above company will apply
this, then their financial issue will
automatically resolve. Along with to
identify the issue they use the KPI
technique.
Role of Management accounting in resolving the financial crises.
Under MAS, a vital range of accounting systems are included and each system has its
own value for business entities in order to sort out the issue because of monetary aspects. Like
in respective organisation, their monetary issue has been sorted by implementation of MAS in
activities and operations. Along with in their competitor company, they are using the price
optimisation system that is providing them data about external stakeholders' perception and
demand of their projects. Hence, the management accounting is beneficial to sort out monetary
issues.
Role of planning tools of budgetary control to overcome from financial problems.

The planning tools are also useful to overcome financial problems. It is so because these
planning tools help to solve the issues (Harun and Kahar, 2013). In the above respective business
entity, this can be assessed that their monetary issue has been sorted by effectively
implementation of budgets and deriving useful information. All these help them in resolving of
issues regarding to finance. Herein, it is important to know that these planning tools work with
the link of systems of management accounting.
CONCLUSION
As accordance of of above project report it can be articulated that MA is becoming a
necessary accounting system such as the financial accounting. Under the report, various kinds of
management accounting systems such as price optimisation system, inventory management
systems are mentioned. Along with various accounting reports are also concluded like
performance report, inventory reports that are linked with the organisation's process. Apart from
it, income statements by absorption and marginal costing are prepared in addition project' s
efficiency is also evaluated by payback period method. In the end, the importance of MAS in
sorting financial problems is also mentioned.

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