Management Accounting Case Studies and Accounting System - Assignment

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................2
TASK 1............................................................................................................................................2
P1. Management accounting........................................................................................................2
P2. Management accounting reporting........................................................................................5
TASK 2............................................................................................................................................7
P3. Calculation of costs for the preparation of income statement. .............................................7
TASK 3..........................................................................................................................................14
P4. Planning tools used for budgetary control...........................................................................14
TASK 4..........................................................................................................................................19
P5. Comparison of organisations to solve the financial problem by using management
accounting system......................................................................................................................19
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................23
1

INTRODUCTION
Management accounting is a concept which involves preparation of management reports
along with accounts in order to provide financial information to managers for the purpose of
making strategic decisions for the organisation (Basu, 2012). It helps in identification, collection,
reporting, measurement, analysing and communicating the same information in such manner that
benefits in pursuing towards goals of company. To understand the concept of management
accounting, Burlington Associates Limited is selected which is a medium sized organisation that
provides financial consultancy services to numerous clients. One of its clients is Murrill
Construction Limited which performs its operations in construction industry. This report covers
management accounting systems and their essential requirement. It further discusses about
methods used for management accounting reporting along with usage of costing techniques to
prepare income statements. It further includes various planning tools and the ways adopted by
management of two companies to resolve financial problems that helps in leading towards
sustainable success.
TASK 1
P1. Management accounting.
Accounting is a practice as well as applied aspects of knowledge which includes
recording as per the well-defined principles and rules of the operations related with the sourcing
and usage of resources to accomplish the business strategy.
Management accounting is a process in which accounting reports are prepared as well
as provided to top level management on accurate time period. Managers of Murrill Construction
Limited uses management accounting to facilitate financial planning, making decisions and
keeping records in effective manner (Bellassen and Stephan, 2015).
Management accounting origin, role along with principles
Management accounting was first emerged during early industry revolution in 19 century.
It was arose after financial management which has traced its origins towards stewardship role at
the time of European trading ventures. Other than this, books are balanced which is also part of it
and used from long ago such as 300 years. From that time, management accounting was emerged
as a recognizable field.
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The role of management accounting is different at workplace based on its requirements as
it is a internal part that performs functions related to financial security, handling taxes,
developing accounting systems, maintaining capital structure, fund flow analysis, decision
making on investment appraisal, financing of projects and hence forth.
Principles of management accounting includes the following:
Influence which says communication must be in such manner that provides insight which
are persuaded.
Relevance that is providing information in adequate manner.
Value shows impact on belief that are analysed.
Trust that is stewardship builds belongings.
Comparison between management accounting with financial accounting
Basis Management Accounting Financial Accounting
Purpose This type of accounting is prepared
with the purpose of internal usage.
Such accounting is used for external
reporting as well as management
purposes.
Regulation There are no prescribed rules as well
as legislations for management
accounting (Englund and Gerdin,
2018).
There are prescribed rules based on
accounting concepts along with
standards.
Users The main user is organisational
management.
The main users of financial
accounting are shareholders,
regulators as well as investors.
Management accounting system: It is a forward looking method that includes practices
which are used by businesses to maintain operations as well as providing information for the
purpose of decision making. This accounting system helps various departments of selected
company to plan, organise, coordinate, communicate, direct, improvements and regulation of
several business activities. Some of the accounting systems are as follows:
Inventory management system: This system is related with tracking present status of
products or services. It benefits in supervision of items along with non capitalized assets in
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effective manner that results in preventing shortages of material at workplace. This system can
benefit Murril Construction Limited by properly tracking and keeping record of incoming as well
as outgoing materials along with finished products. Using this system, managers can get
information related with current inventory level that results in minimising circumstances related
to over stock or under stock of materials which adds values to keep track of record which adds
value to organisation by keeping detailed record and using them at the time required for analysis.
The essential requirement of inventory management system is to track and maintain records in
systematic manner based on existing or new stock that enters or leaves warehouses or
construction sites at some point of sale.
Cost accounting system: It is another type of accounting system that helps in analysing
product costs such as fixed or variable costs. Its main functionality is to ascertain value of
inventory, controlling costs as well as profitability analysis (Fayol, 2016). Managers of Murril
Construction Limited uses this system to estimate cost of products or services in accurate manner
that that results in profitable operations. It adds value to company by estimating cost of products
or services in order to predicting profits or losses in accurate format. The essential requirement
of such system is to fix standards, determining costs as well as classification of costs such as
factory cost, direct cost, prime cost and so on.
Price optimisation system: A mathematical program which calculates demand
variations at different pricing levels is price optimising system. It performs functions related to
combining data with relevant information based on inventory and cost level to provide
recommendations to change prices for the purpose of improving profits. Such system adds value
to business by understanding perception of clients towards prices of products or services which
are rendered by organisational members and formulating prices accordingly. Price optimisation
system is used by managers of Murril Construction Limited to determine prices of constructional
projects as well as discovering pricing structures as per customer willingness related with
making payment decisions. The essential requirement of price optimising system is to determine
prices of various constructional projects that helps in maximising profits.
Job costing system- Job costing system can be defined as calculating total cost of
particular products and services. Murrill construction limited adopts this system to accumulate
information based on direct material, overhead costs as well as direct labour and it can be
tailored as per the requirements of customers. Functionality of job costing system is to determine
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material cost, factory overhead and labour overhead related with particular job or project. This
system adds value to enterprise by setting standard targets as well as tracking all revenues
pertaining to different jobs in discrete batches. The essential requirement of job costing system is
to ensure that product or job price covers all actual costs and at the same time provide profits.
Benefits of management accounting systems:
Systems Benefits
Cost accounting system  This system is applied at Murrill
Construction Limited that benefits in
providing accurate value of prices of
buildings or projects. Cost accounting
system serves as controlling tool as it helps
the managers of the company to control
prices involved in construction procedures.
Job costing system  Such system applications benefits in
tracking performances of particular job
which provides profits to selected business.
Inventory management system  Applications of inventory management
system benefits in tracking available as
well as required stock level for the purpose
of overcoming situations related to
overstock as well as under stock.
Price optimisation system  Price optimising system is applied to
prepare reports based on the calculations of
demands at different pricing levels. It
benefits Murrill Construction Limited by
providing bases for recommendations
related to changing price structure (Hrasky
and Jones, 2016).
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P2. Management accounting reporting.
Characteristics: Management accounting system posses certain characteristics that are
relevant with various aspects. Some of the characteristics are as follows:
Reliable: Trustworthiness or reliability of accounting systems for the preparation of
financial statement.
Accuracy: It ensures that stated values on financial statements are accurate as well as
reflects supporting factual data.
Up to date: Financial statements must be updated with all transactions as on specified
time period.
Management accounting reports must be comprehensive and understandable as:
 Accounting reports should be understandable as by analysing these reports managers of
Murrill Construction Limited prevents obfuscating as well as misleading usage of
financial statements at time of making decisions.
 These reports must be comprehensive as they provides detailed information or summary
of sources of expenses as well as incomes that helps in understanding profitability of
business.
Management accounting reports: Managers prepares different types of accounting
reports and at the same time these reports have significant role in providing information to top
level management (Hyndman, 2016). These reports are used for the purpose of planning,
decision making as well as measuring performances. By evaluating such reports important
strategies along with decisions are formulated for the betterment of organisation. Some of the
management accounting reports are as follows:
Performance reports: In reference to management accounting, these are used for
evaluating performances (goals accomplishment under an effective and efficient use of the
resources available for that purpose) of employees as well as organisation as whole. It is used at
Murrill construction Limited to analyse performances of different departmental members.
Budget reports: Using this report, managers of Murrill construction Limited makes
estimation for expenses and incomes for specific period of time. They compare actual financial
performance with budgeted estimations and frame effective strategies in order to control
deviations. Thus, budget reports help in controlling financial transactions as to attain objectives.
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Account receivable reports: This report is used to make list of unpaid customer invoice
along with credit memos which are unused by date ranges. It categorises account receivables
according to time outstanding for invoice. Using this report, Murrill construction Limited
managers identify defaulters along with financial health of potential clients. It is prepared in
systematic manner which provides detailed information related to transactions such as date, time,
particulars, amount and so on which reduces complexities to calculate credit values which brings
transparency in collection of credit from various creditors.
Cost management accounting reports: This report helps in computing cost of products
by taking into consideration other costs such as raw material costs, overhead costs, labour costs
and so on that adds costs to products. Financial manager of Murrill Construction Limited uses
this report to provide information related with cost price along with selling price of construction
projects or buildings in order to estimate margin of profits. Inventory wastages, hourly labour
costs and over costs are involved in such report.
Integration of management accounting system and accounting reports: For the
preparation of management accounting reports managers uses accounting systems. These
systems provide necessary information on accurate time period at the time of preparing reports
which are further used by top managers of Murrill construction Limited to make decisions to
achieve results.
TASK 2
P3. Calculation of costs for the preparation of income statement.
Cost: The total amount that is paid by the customer in order to buy the product. For the
purpose of attracting customers, managers of Murrill Construction Limited sets appropriate costs
pertaining with different buildings or projects (Ionescu, 2016).
Fixed Cost: A type of value that does not changes with changes in particular activity is
termed as fixed cost. It remains fixed during accounting year.
Variable Cost: A worth which varies when changes are seen in different level of activity
are known as variable cost. This type of cost is related with direct material cost.
Semi variable Cost: A cost that has features of fixed cost as well as variable cost.
Cost analysis: The breaking down into constituents of cost summary along with
understanding as studying each factors is defined as cost analysis. It is used to make comparisons
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of standard costs with actual costs during a specified time period and disclosing the same for
further improvements.
Cost volume profit: It a type of cost analysis in which changes in costs as well as
volume are determined that affects operating income of any business.
Flexible budgeting: It is analysed and adjusted as per changes in activity at the time of
completion of projects.
Absorption costing: It is a costing technique that helps in evaluation of costs during an
accounting period. Herein, to sell single product in competitive market place, Galway Plc
calculates cost of product by using such costing technique (Ionescu, 2016).
Marginal costing: It is a costing method that emphasis towards classification of all
expenses in terms of variable as well as fixed costs (Jones, 2014). On other hand all fixed cost
are charged as per period costs. Calculations based on marginal costing technique are as follows:
Income statement under Marginal costing method for month of May & June
8

Working note:
9

Interpretation: From the calculation of marginal costing it can be interpreted that net loss is £
550 for the month of May and profit is £ 5750 for the month of June.
Income statement under absorption costing method for month of May & June
10

Interpretation: from the above calculation it can be interpreted that the organisation has net
profit of 1050 £ in the moth of may and 9792.4 £ in the month of June.
Working note:
11

Valuation of closing stock using LIFO
12

Valuation of closing stock by using weighted average method:
13

Cost allocation: Procedures based on identification, recording, aggregation as well as
assigning costs to different items, products or services. Such procedures are termed as cost
allocation. Methods of cost allocation are as follows:
Normal costing: Costing method which is used by managers at the time of deriving costs
to different projects at Galway Plc. Managers considers actual costs of labour, material along
with standard overhead rates for the purpose of allocation.
Standard costing: This type of cost is used to compare standard targets with actual costs
under normal conditions. Managers considers historical data to allocate standard costs.
Activity based costing: An accounting method that is used for identification as well as
assigning costs to activities based on overheads. Further, costs to different products are assigned
Role of costs: Costs plays role at Galway Plc to estimate unit cost of projects as well as
evaluating performances and removing unnecessary transactions at the time of allocating costs to
different products (Kaplan and Atkinson, 2015).
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Inventory costs: The cost which is associated with storage, management as well as
procurement of inventory is inventory cost. Types of inventory costs are:
Ordering cost: It includes procurement as well as logistics costs.
Carrying cost: It is related with inventory storage cost along with capital cost.
Benefits to reduce inventory costs: By reducing inventory costs, managers of Galway
Plc are benefits with reducing wastages, consolidating supplier base, forecasting demand and
improves management of supply chain.
Valuation methods: Methods that provides specific ways that helps in determining value
of intangible assets, security and estimation of business worth are valuation methods.
LIFO method: This is used for providing accounting values to inventory on the basis of
last in first out.
FIFO method: Another method which is used for valuation of inventory as per first in
first out at constructional project sites.
Managers of Murrill construction Limited uses FIFO method for constructional purposes
(Khlif and Chalmers, 2015).
Cost variances: Difference between budgeted amount and actual incurred cost is known
as cost variance.
Overhead costs: Such cost is considered as necessary business expense which includes
all costs related with administration salaries, insurance, rent, utilities and so on.
TASK 3
P4. Planning tools used for budgetary control
Budgetary planning and control: It is characterised as tool that is used for preparation
of budgets along with used for controlling purposes. It is a process that is followed by managers
to set financial as well as performance goals with the help of budget. This is the comparison
between actual results and budgeted figures of an entity for the future. Murrill Construction
Limited follows budgetary control measures adopted such as, master, operating and zero-based
budget.
Preparing a budget: The process of budget includes setting a plan of action with goals,
identification of income and expenses of the company, forming expectations by reconciling the
data, monitoring actual data with budgeted figures to get an estimation of what is to be made,
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adjusting the requirement as per the projected income as well as expenditure, making a draft to
get it checked by a senior personnel, preparing the budget.
Different types of budgets: Murrill Construction Limited uses various types of budgets
such as:
Capital budgets: This type of budget which deals with the planning of the long term
investments that are associated with expensive assets, and other resources needed to run properly
the business. It helps Murrill Construction Limited to allocate all funds in order to acquiring as
well as maintain organisational fixed assets.
Operating budgets: It is considered as annual plan that is prepared monthly, quarterly or
annually which is used for projecting incomes as well as expenses related to daily activities. This
type of financial estimate which is used by selected organisation with the aim to determine
necessary funds required to carry daily expenses in effective manner which results in smooth
functioning of operations by eliminating hurdles.
Alternate methods of budgeting: Murrill Construction Limited also uses alternate
methods of budgeting with the objective of planning long with controlling various other costs
(Lampe, Hilgers and Ihl, 2015). Some budgets with advantages as well as disadvantages are as
described:
 Zero-based budget: It involves preparing a forecasting plan for each cost centre or
activity from zero base. This requires justification of all expenses within an accounting
year. It is required to be built around what is needed for the upcoming year. Murrill
Construction Limited plans new budget every year with no reference to the prior records
(Khlif and Chalmers, 2015).
Advantages: It can increase the motivation among staff by promoting a culture of
efficiency. This responses to changes in business environment.
Disadvantages: Short term benefits might be emphasised. This is a time extensive process
as it is prepared from scratch.
 Master budget: It is an aggregation of all the low level prediction of revenue into one
that are produced by a company's various functional areas. Murrill Construction Limited
makes master budget for estimation of its sale, production as well as manufacturing
activities.
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Advantages: Such budget helps managers of Murrill construction Limited to identify
problems in current time period for the purpose of planning future activities. Master budget helps
in identifying which department is spending more that cause problems to achieve profitability.
Disadvantages: This budget lacks specificity and at the same time it is very difficult to
update uncertain transactions in less time period.
 Cash budget: In this financial estimation, all cash related transactions are recorded in
systematic manner such as all received amount are recorded in receipts side where as all
paid amounts are recorded in payment side. Murrill construction Limited also prepares
this budget to understand nature of transactions (Parker and Fleischman, 2017).
Advantages: By breaking down accounting period in different time form, this budget
provides easily monitoring of cash transactions. The changes are easily understandable by
managers through this budget.
Disadvantages: Such budget causes distortion as well as does not provide accurate results
as credit transactions are not part of it.
Behavioural implications: Budgets are important as they play essential role in Murrill
Construction Limited for the purpose of planning, organising, managing, directing as well as
controlling variances. There are different types of budgets that facilitate controlling
organisational resources at various stages within different departments to provide appropriate
and accurate information.
Pricing strategies: Such strategies are set after considering market conditions, trade
margins, segmentation, competitors actions, ability of clients to pay and so on aspects. Some of
the pricing strategies adopted by Murrill construction Limited are as follows:
Penetrating pricing: Under such strategy, lowers prices are set my managers of chosen
business for the buildings or projects in order to attract as many buyers as possible.
Premium pricing: Using premium pricing strategy, higher costs are set for specific
buildings whose interior is unique and not been used by competitors.
Competitors determine prices: Competitors determine prices on the basis of direct as
well as indirect competition along with markup pricing strategy.
Supply and demand consideration: Such consideration encompasses time series,
adequate resources, income level of buyers, software tools, consumer preferences, statistical
forecasting and other factors (Raj, Walters and Rashid, 2017).
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Strategic planning: Written guidelines which involves actions, plans, strategies and so
on for the purpose of attaining business goals. Some of the strategic planning adopted by
managers of Murrill construction Limited are as follows:
PEST Analysis:
Political factors Economic factors
 Changes in political systems as well as
political decisions related to taxation
policies, restrictions, findings impacts
on financial position of any business as
managers have to change their
strategies as per the new provisions of
political system.
 When there are changes in inflation
rates, interest rates or bank rates that
results in hindrances to achieve
objectives of Murrill Construction
Limited which results in affecting
financial position in competitive market
(Shette, Kuntluru and Korivi, 2016).
Social factors Technological factors
 Such factors includes status, income,
perceptions, beliefs and other factors. If
perception of clients shifts towards
competitor buildings then it impacts on
financial position of selected business.
 Adoption of new technological
advancements such as construction
machines, artificial intelligence
improves working status of company
and enhances financial position of
Murrill Construction Limited.
SWOT analysis:
Strength Weaknesses Opportunities Threats
 Murrill
Construction
Limited
executes their
operations at
high speed and
 Selected
construction
company has
limited global
presence.
 The company
has opportunity
to expand its
operations in
internal market
(Shi, Zhang,
 The biggest
threat for
Murrill
Construction
Limited is
strong
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has made a
market image
which is the
strength.
and Guo,
2010).
competition
level in
construction
industry. The
competitors are
Asseal
Architecture
Limited and
BSE
Construction
Ltd.
Balanced scorecard: Another strategic planning tool which is used with the purpose to
identify as well as improve internal functions that results in external outcomes. A performance
metric that is adopted by managers of Murrill Construction Limited in order to measures
financial position and ascertain feedbacks to align daily operations in effective manner. It
benefits in execution of constructional operations in comprehensive manner.
(Illustration: Balance Scorecard)
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TASK 4
P5. Comparison of organisations to solve the financial problem by using management accounting
system
Financial problem: These are the situations which are faced by various companies due
to shortage of funds. When organisations are facing such problems they are not able to meet their
basic requirements or essential operations. Different businesses have different list of financial
problems but all these affects profitability of business at large extent. Management formulates
various effective strategies and implements the same to overcome such problems. Some of the
financial problems faced by Murrill construction Limited are as follows:
Over expenses: Selected business faces the problem of over expenses as they spend
more on activities such as promotional campaigns than earning from operational activities which
results in reducing margin of profit (Lampe, Hilgers and Ihl, 2015). Managers have to control
such problem by implementing strategy related with reducing over expenses.
Cost management: Managing direct or indirect costs is very important as they are
associated with organisational operations. Management authorities of selected company performs
operations related to construction of building and projects which includes various uncertain
situations and identifying indirect costs in such situations is not an easy tasks that results in
failures to identify indirect costs as to measure performances along with evaluating results.
Issue related to balance sheet: The list of transactions in balance sheet is very long and
requires high professionals to manage expenses as well as revenues in efficient manner. Murrill
construction faces this issue due to more expenses than revenues.
Financial governance: Financial governance is a process in which activities are based on
understanding, calculating and presenting financial information in such format that is
understandable. Various techniques are used by Murrill Construction Limited in order to prevent
such problems such as tracking all transactions and preparing reports, managing performances,
controlling operations of business processes.
Being Burlington Associates Limited the financial consultant of Murrill Construction
Limited, is responsible for identifying causes of financial problems as well as should provide
accurate solutions in order to resolve problems (Siraj, 2012).
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Management accounting approaches: The ways that helps managers in resolving
financial problems are termed as management accounting approaches. Several approaches helps
in attaining objectives of company in prescribed manner. Some of them are:
Benchmarking: Discovering ways to achieve best performances by comparing
strategies, procedures, plans with other companies in the same industry and setting standards is
termed as benchmarking. Detailed informations is provided to accountants in order to identify
gaps for achievement of organisational mission along with objectives (Bellassen and Stephan,
2015).
KPI: A quantifiable measuring tool that describes the ways to effectively achieving
objectives by setting targets for individuals as well as company as whole. Financial KPIs are
used for assessing activities that are related with attaining strategic objectives. On the other hand,
non financial KPIs includes measurement of activities related with supply chain management,
customer relationships and so on. It helps in collecting feedbacks as well as arranging
informations and feedbacks which inspires valuable actions towards growth as well as success of
Murrill Construction Limited.
Budgetary targets: It is defined as an estimated amount that helps in identification of
variances as well as problems in an accounting period. Accountants uses such approach to
formulate financial goals with specifies budget plan.
Financial governance: Financial governance is a process in which activities are based on
understanding, calculating and presenting financial information in such format that is
understandable. Various techniques are used by Murrill Construction Limited in order to prevent
financial problems such as tracking all transactions and preparing reports, managing
performances, controlling operations of business processes. It is used with the aim to monitor
strategies and controlling circumstances.
Skills of management accountant: A management accountant must possess following
skills:
Communication skills: The accountants must have communication skills to demonstrate
informations to managers at all levels of hierarchy. By properly communicating with top level
management, various strategies can be formulated to deal with problems (Hyndman, 2016).
Business Knowledge: Such knowledge is mandatory to be in an accountant as thorough
knowledge of business is required to analyse accounts as well as business plans. Such skill is
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required for making innumerable business decisions that helps in preventing financial problems
before the time they occur.
Comparison between Murrill Construction limited and Galway Plc
Basis Murrill Construction
Limited
Galway Plc
Problem The financial managers of
Murrill Construction Limited
are facing problems of over
expenses, issue related to
balance sheet. They have poor
cost management techniques
as well as focuses more on
spending in promotional
activities which results in more
expenses than generated
revenues.
The accountants of Galway
Plc faces the financial
problems related to problem
of cost management. They
fails to predict the costs
involved in construction of a
project due to wastage of raw
materials.
Approach The management should apply
approach of benchmarking
through which they can
analyse the ways in which
other companies in same
sector apply strategies or
tactics to control their
spending and can apply the
same (Lampe, Hilgers and Ihl,
2015).
The management can apply
approach of key performance
indicator in order to measure
performance of machines or
financial products at the time
of constructing buildings as to
determine appropriate prices of
different projects or services.
Effective Strategy Managers should adopt
effective strategy of promoting
building projects through
social media which will reduce
Managers should adopt
strategy of recording all
transactions at accurate time
on which they occur in order to
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the spendings and helps in
overcoming from over expense
issue.
reduce wastage of materials.
Organisations uses management accounting tools in order to overcome from financial issues and
implementing effective strategies. Murrill Construction Limited and Galway Plc uses cost
accounting system to control prices of construction projects and to predict prices for future time
as to overcome the problem of over expense.
CONCLUSION
From the present report it can be concluded that recording and maintaining financial
statements is very important. Management accounting and financial accounting plays important
function of providing financial information to managers for taking critical decisions.
Management accounting systems includes price optimisation system, inventory management
system, cost accounting system, and job costing system. There are various management
accounting reports that are classified as performance reports,, account receivable reports, budget
reports as well as cost management accounting report. Absorption cost and marginal costing
techniques are used for preparing income statements. Planning tools includes budgets which are
capital, operating, zero-based, master budget that are used by managers. Financial problems
faced by company are over expenses, cost management and issues related to balance sheet.
Organisations adopt approach of benchmarking, key performance indicators to resolve problems
and to lead towards success.
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