Management Accounting: Types, Methods, and Budgetary Control

This report provides an explanation of management accounting and the essential requirements of different types of management accounting systems. It also explains different methods used for management accounting reporting, techniques of cost analysis, and the advantages and disadvantages of different types of planning tools used for budgetary control. Additionally, it discusses how organizations are adapting management accounting systems to respond to financial problems.

Management
accounting

Table of Contents
Introduction......................................................................................................................................3
Main Body.......................................................................................................................................3
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems.................................................................................................3
P2 Explain different methods used for management accounting reporting................................5
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs...........................................................................7
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................7
P5 Compare how organisations are adapting management accounting systems to respond to
financial problems.......................................................................................................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12

Introduction
Management accounting is the process of identifying the problem, analysing, interpret the
situations which is helpful of managers to take any decision related to their business profit. It
helps in providing that useful information to managers which is required by them to take major
decisions for business for the growth (Syarif and Novita, 2019). The following report covers
explanation of management accounting and essential requirements of different types of
management accounting systems, different methods used for management accounting reporting,
techniques of cost analysis, advantages and disadvantages of different types of planning tools
used for budgetary control and how organisations are adapting management accounting systems
to respond to financial problems.
Main Body
P1 Explain management accounting and give the essential requirements of different types of
management accounting systems
Management accounting is the process of collecting, analysing and interpreting data which
is essential for managers to take decisions for company’s benefit. It is a wide concept which
cover forecasting and planning, measuring employee’s performance, monitoring cost control
over business, making budgets for other departments and many others. It consists of taking
decisions related to monetary system as well as non monetary system. For example if company
are spending more money than they earn then management accountant checks the financial
documents and take decision to cut down unwanted expenses of business. On the other hand to
increase the employees performance by providing them training is also the work of management
accountant (Ratnadi, Ariyanto and Putra, 2020).
Different types of management accounting systems are explained below-
Job costing system- It is the process of assigning the cost to a particular job role which is
most important job role of the organisation. This is mostly used in construction companies where
each project is assigned with specific cost under which they have to complete their task. Eastern
Engineering Co. Ltd. is a construction company which uses job costing system to analyse the
cost of each project.

Inventory management system- This is used to manage inventory of a particular business.
In involves the management of manufactured goods, management of warehouses, management
of supply chain and many others. This management system is required for manufacturing
industries that manufacture goods in bulk and store them in warehouses for future use. It
involves that how manufactured products can be arranged in warehouses that which product and
in how much amount will be kept in which section of warehouse. A proper inventory
management system plays an important role in managing supply chain of a company.
Price optimization system- It is the managerial accounting system where company
decrease and increases the prices of their product according to the situation in market (Mariina
and Tjahjadi, 2020). The main aim of this system is to enhance the quick selling of products at
right places which makes profit for the company. Here, companies up and down the supply chain
for business to business and for business to customer settings.
Cost accounting system- This is the managerial accounting system which is mostly used
by manufacturing industry to record the production activities of their company. This system
records all activities of production like purchasing of raw material, converting the raw material
to finished goods and many others. It tracks the flow of inventory through the various stages of
production.
The difference between financial accounting and managerial accounting are explained below-
Basis of Difference Financial Accounting Management Accounting
Main aim The main aim of financial
accounting is to provide
information related to finance
to interested parties like
customers, employers,
stakeholders and many others.
The main aim of management
accounting is to provide useful
decision which is helpful in
taking business decisions for
the benefit of company.
Time period It can be made at the end of
financial year and it involve the
past 1 year of expenses and
revenues. For example 2019
financial statement will be
shown in 2020 and 2020
There is no fix time to use
management accounting. It’s
upon the will of managers that
anytime anywhere they can
prepare reports. It’s basically
focuses on future activities of

financial statement in 2021. organisation.
Data type It consist only quantitative data
which means the data which is
having numbers, statistics and
etc (SAN and et. al., 2018).
It consist of providing both
quantitative data as well as
qualitative data which consist
of numbers, statistics,
behaviour of employees,
planning for strategies and etc.
Data users Customers, employees,
managers, governments,
shareholders and many others
are the data users of financial
accounting which means
insiders as well as outsiders are
allowed to use it.
Managers and employees are
the users of management
accounting which means only
insiders are allowed to use it.
P2 Explain different methods used for management accounting reporting
Management accounting reports are those records which are made by managerial
accountant to measure the performance of every employee by recording them in a sheet. This
report is made at any time whenever manager wants to make it by observing the performance of
employees for few days. This is very essential to prepare these reports to find out who is
performing well in the organisation and who is not. In case of non-performing employee training
session will be provided to them and in case of well performing employee, they must be
rewarded for their performance (Wahyuni and Putra, 2020). In context of Eastern Engineering
Co. Ltd., they have few employees but then also they record the performance of their each
employee and they also record the cost of resources incur by each employee. All this can be done
by management accounting reporting system. There are many types of reporting and some are
explained below-
Budget managerial accounting reports- Every company make budgets for their overall
business activities and the company have to complete the task under this budget. Budgets are
made to cut down unwanted expenses and use that amount in other productive activity. A
company make budgets for each departments like financial department has different budget to

work, marketing department has different budget, and production department is assigned with
other budget and many more. All these departments have to work under their budget. In case any
department cross the budget line then there is some kind of unproductive activity in that
department which means that department is not performing well. On the other who work under
fixed budget is well perform department. Eastern Engineering Co. Ltd makes budgets for their
each department so that they can work separately with full flexibility. This also helps Eastern
Engineering to eliminate their unwanted expenses on unproductive activities in some
departments which can be identified only by using budgets.
Account Receivable Aging Reports- This report is made in the case of business relies on
extending credits most of the time. Hence, to identify the reason of delay in payments to clients
and paying back the credit loans this reporting system is used (Kurniati, Haji and Renaningtyas,
2019). Basically, manager breakdown the amount of client and also breakdown the time period
to measure defaulters of business who acts as obstacles for paying back the credits of business.
In case of many defaulters then manager must change whole credit policy of company and in
case only few members is found as defaulters then manager must give them warning for such
irresponsibility in organisation. Bad debts must be written off as soon as possible. Making it a
habit of paying delay of all credits is not a good thing for business. This report is made by
Eastern Engineering to check whether there are any credits on them or not and in case of late
payment of bad debts then it uses to identify that what is the reason of late payment of bad debts.
Performance Reports- Performance report is made to check the overall performance of
whole organisation as well as to check the performance of each employee within an organisation.
These reports are made to identify which employee is performing well and which is not
(KARSHALOVA and et. al., 2018). This is also done by department wise. Manager observe
everything from employees activity at workplace to financial reports and background of that
employee then manager record the performance in their sheets and at the end of every month
they conduct a meeting to discuss what’s going on in organisation that who is performing well
and who is not and what are the reasons of not performing well. This records are also helpful to
motivate workforce by providing rewards to well performed employees and providing training
sessions for non-performing employees. This performance reports are also considered as helpful
for employers to identify where they are lacking behind and what measures can be done to
improve their performance. In context of Eastern Engineering company, they are dealing under

construction industry where the performance of every employee is based upon the effectiveness
of their projects under low cost as much as possible. Hence, their performance reports are made
upon success of their projects on construction sites.
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs
Cost is the monetary value which is to be paid to gain something in return.
Marginal cost- It is the cost which increases or decreases in case one more unit or
product is produced to serve an additional customer. This cost is useful for measuring overall
cost which is enough to gain a particular amount of profit. It is also used to control the
overproduction of outputs within the business. Sometimes overproduction can impact negatively
upon business as they can convert organisational profit into loss by storing these over production
material in warehouses for long period of time.
Marginal Costing Jan Feb
Sales 1323000 1568000
Less: marginal cost of sales 311000 354500
Variable Production Cost 320000 368000
Closing stock 9000 22500
Opening Stock 9000
Contribution 1012000 1213500
less: Fixed production cost 352000 352000
Net Profit 660000 861500
Absorption cost- Absorption cost is that cost which includes all related cost which incurred
during producing a product at company (Chathurangani and Madhusanka, 2019). The direct and
indirect both cost are taken into consideration in absorption cost like raw material cost, labour
cost, rent, electricity consumed to produce that product and many others. This cost is used to
identify overall expense of business which is spending to produce a single unit of product.
Absorption costing
Calculation of total cost and per unit cost Jan Feb
Fixed production cost 320000 368000
Variable production cost 450000 517500
Total cost 770000 885500
Per unit cost 77 77

Income Statement
Jan Feb
Sales 1323000 1568000
Less: total cost of sales 754600 862400
Variable Production Cost 320000 368000
Fixed Production Cost 450000 517500
Closig Stock 15400 38500
Opening Stock 15400
Gross Profit 568400 705600
Less/Add Under Absorption fixed cost 32000 16000
Net Profit 600400 689600
P4 Explain the advantages and disadvantages of different types of planning tools used for
budgetary control
Budgets are made by companies to minimize overflow of expenses. Budgets are the
documents which are made on expectations factors that how much money is required to complete
that task for one department. It is made for a particular period of time. In other words budgets
provide expected revenue and expenditures of an organisation for a particular period of time
basically for 1 financial year.
Budgetary control is the process of controlling over expenses of an organisation by
adopting some ways (Bufoni, Ferreira and Oliveira, 2018). This can be done to control
production and selling of products and services to promote less wastage of organisational
resources. It also leads to promote communication and coordination among different departments
which further motivate employees and enhance their performance. A budgetary plan is made to
cover all activities of an organisation to identify which activity is done at what time and in hoe
much cost. Budgets also help to eliminate unproductive activities from organisation. In context
of Eastern Engineering, they make budgets because their whole process of work is based upon
budget itself. It’s an construction company and no construction can be done without a fixed
budget. Hence, their main business activity is to focus upon their budgets and work under that
budget.
Below are some types of planning tools used for budgetary control-
Cost volume profit analysis- It is used to analyse the effect of sales volume and cost of
product on the operating profit of a company. This method is used to identify impact upon

operating profit by changing in variable cost, fixed cost, selling price per unit and many more
expenses related to sale and production of product. Cost volume profit analysis is a planning tool
which is used by companies to estimate their revenue and expenses from sales, production (Boyd
and Pitre, 2020). This method further help to analyse by a mathematical formula that how change
to cost and sales volume will affect future profit generation for a particular period of time. This
method is also used by manages to identify the breakeven point of product which further means
the case of no profit and no loss.
Advantages and disadvantages of Cost volume profit analysis and explained below-
Advantages Disadvantages
 It is easy to calculate by using just a
simple mathematical formula.
 This method assumes that all cost are
fixed but the true is there is the mixture
of both cost fixed cost as well as
variable cost in any company.
 This method help the manager to
identify breakeven point which further
help the manager to find out those stage
from where low performance can lead
to shut down of business.
 This method assumes that sales are
constant and demand changes over
period of time whereas the truth is sales
can also be managed according to the
demand.
 This method estimates the sales volume
to achieve targeted profit. Hence,
managers can prepare budgets by using
this method at any time whenever they
want.
 Separation of fixed cost and variable
cost is not an easy task. Hence it
assumes lot of time and mental power
of manager (Rybicka and Rybicki,
2018).
Pricing Strategy- Price is the monetary amount which is to be paid by customer to
purchase the product. Price of product is labelled on product and it can be determined by taking
various factors into consideration like customer’s purchasing power, cost required to
manufacture that product, cost of raw material used, profit margin and many others. There are
many pricing policies like price skimming, penetration, premium and etc. A business set prices
to deliver a perceived value of their customers. Setting prices of a product can act as the tool of
budgetary control because prices decide under how much cost they should manufacture their

products (Ostaev and et. al., 2019). For example the price of a product is $8 then it is compulsory
to produce that product under the cost of $8 only. In case cost exceed the price then company
have to face loss. Hence, pricing strategy is also a good tool for budgetary control.
Advantages and disadvantages of pricing strategies and explained below-
Advantages Disadvantages
 Pricing strategy is not only used to
control the budgets but it also used to
attract more customers.
 Most of the time companies set prices
according to cost incurred to
manufacture that product and they did
not consider that factor of willingness
to pay by customers which further
results in declining in overall sales.
 It helps in determining all factors which
is used for setting prices which help the
company to know what will impact
upon these factors and what are not.
 Calculating price of a product is very
complicated. Hence it includes lot of
time and mind power to decide actual
price of product (Balios, 2021).
 Using low pricing helps to attract more
customers and using high prices help to
make standard and it implies good
quality of product.
 Using low prices may put question on
quality of product and using high prices
can lead to switch customers perception
toward other brand.
P5 Compare how organisations are adapting management accounting systems to respond to
financial problems
Financial problems are the problem which take place due to lack of adequate finance within an
organisation, inefficient use of business finance, spending too much money upon unproductive
activities, not paying credit loans on time and many others. Finance is the backbone of every
company because all activities are depends on it from purchasing raw material to delivering
finished goods to customers (Shalaeva, 2018). It is compulsory to overcome with financial issues
as soon as possible for effective working of each department. Comparison of Eastern
Engineering Company with Sigma Constructions in context of their different financial problems
and different ways to overcome with their financial issues are explained below-

Basis Eastern Engineering Sigma Constructions
Financial problem Eastern Engineering is a small
scaled company which is
having main problem that how
they raise money for their
business activities or for their
projects. They are not getting
sources of funds. Secondly,
they are facing problem of
paying their credit loans
quickly.
Sigma Constructions is a
company based in UK which
is having financial issue that
their financial statements
every year show increase in
expenses without changing
any method of production or
without changing any
technology. Secondly, their
finance manager is not
providing financial statements
on time and did not explain
the entries appropriately.
Overcome with Financial
issue
To overcome with this issue
Eastern Engineering is
suggested to analyse their
business to that in which
department and how much
finance is required. They can
opt bank loans to finance their
business because in UK
interest rate is too low which
is 0.1% . Hence, paying low
interest rate is much better
than sitting ideal without
finance. Secondly, they have
to written off their bad debts
as soon as possible to get
another bank loan. For this
they can use Account
To overcome with this issue,
they are required to make
budget for each department
and tell each department
manager to work under
required budget. In case any
department exceed the
budgets, then company is
required to analyse each
activity of that department and
required to eliminate
unproductive activities from
that department. For second
financial issue, Sigma
Constructions is required to
change their finance manager
and hire loyal and trusted

Receivable Aging Reports
method which identify who
are defaulters for not paying
the credit loans on time
(Abugalia and Mehafdi,
2018).
financial manager who make
time to time financial
statement for company at the
end of every financial year
and willing to describe it to
managerial accountant if
required. Hence, hiring
experience good reputed
financial manager is
important.
Conclusion
From the above information it is concluded that management accounting is used to gather those
useful data which is used to take essential business decisions. Reporting is the process of
measuring performance and take corrective measures to overcome the issues and problems and
there are many methods of management accounting like Budget managerial accounting reports,
account Receivable Aging Reports and many others. Cost is the value of producing the product.
Budgets are made to control the unwanted expenses and enhance the performance of employees
to achieve organisational goal on time. Financial problems are those problems which are related
to finance like lack of funds, improper use of funds, delay in paying credit loans and many
others. It is compulsory to overcome with financial issues as soon as possible for the profit of
company. Finance must be managed properly.

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