Management Accounting System and Essential Requirements

This report discusses the management accounting system and its essential requirements. It also evaluates different methods used for management accounting reporting and calculating cost using appropriate costing techniques.

Management
Accounting

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
P1 Management accounting system and essential requirements of management accounting
system..........................................................................................................................................1
P2 Evaluate different methods which is used for the management accounting reporting...........3
P3 Calculating cost by using appropriate costing techniques......................................................4
P4 Advantage or disadvantage of different types of planning tools............................................6
P5 how management accounting helps in solving financial problems........................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is the process which includes the various practices which help the
organization to improve their operational activities. It is also called managerial accounting which
helps the manager at the time of building effective strategy for the further decision making
process. Management accounting use the financial information which aid in improving and
controlling various functions. In this process, manager analyse the business cost which helps in
producing financial reports. Heatrod Elements Ltd selected for the better understanding of this
concepts. It is UK based manufacturing company which deals in heating elements in the early
1960 (Heatrod Elements Ltd, 2019).
This report includes the various topics such as management accounting and essential
requirement of management accounting system. In addition, it includes the various accounting
reports, management accounting techniques and different planning tools to resolve financial
problems in the organization.
MAIN BODY
P1 Management accounting system and essential requirements of management accounting
system
Management accounting: It is a continuous process of preparing various reports with the
help of financial information. It will help the manager to develop various effective strategies and
in decision making process. Potential investors will take appropriate decision as per financial
report of the company (Abdel-Kader, 2011).
Difference between financial or management accounting:
Financial accounting includes the various accounting standard which required to follow
for the preparation of financial statements which further used by the manager for the internal
decisions. Management accounting use financial information for operational reports which is
used by the internal as well as external parties. So, inventors can take decision regarding their
investment in the organization.
Management accounting systems:
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With the help of management accounting system, manager evaluates or measures the
internal process or structure. It includes the various systems which help the Heatrod Elements
Ltd to manage their operational functions and it is discussed below:
Cost accounting system:
It is most usable system in the manufacturing sector because with the help of this, manager
identifies each unit cost of product. It is accounting system where cost of production is calculated
for valuation of inventory, profitability and cost control. It is essentially required by the manager
of Heatrod Elements Ltd, so they can reduce the cost which automatically increases the
productivity or profit margin. So manager use this system to analyse or control their product cost
at every level (Akbar, 2010).
Inventory management system:
It is an inventory management system which helps the manager to analyse the level of
stock in their warehouses. So they can further take actions according to it, which reduce the
wastage in the production. It is required by the organization to keep track inventory level in the
business which prevents the shortage as well as wastage. In Heatrod Elements Ltd, manager
required this system to enhance the efficiency or effectiveness of operational functions.
Price optimising system:
It is a mathematical analysis which contains various information regarding customer
demands. With the help of this system, manager identifies the buying behaviours of customers.
Price of product depends upon the demand of different product & services which offer by the
organization to increase their productivity or profit margin. It contains various information which
further required for the estimation of cost and inventory level. This system required for the
observation costumer behaviour on different pricing, different channels are used (Callahan, Stetz
and Brooks, 2011). This system essentially required to set best prices of Heatrod Elements Ltd to
maximum their customers with help of affordable price range.
Benefits of management accounting systems:
Management Accounting System Benefits
Price optimisation system Manager identifies the customer behaviours regarding
different price range of products. It helps in minimising
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the price of products & services as per their requirement.
Which further helps in minimising the cost as maximise
the profit margin.
Inventory management system It helps in controlling inventory cost which reduce the
wastage or provide the transparency of stock availability.
Along with this, it increases turnover as well as customer
satisfaction.
Cost accounting system It helps in reducing per unit cost which saves the time and
improve the efficiency. With the help of this system,
manager increase the productivity and profit margin too.
P2 Evaluate different methods which is used for the management accounting reporting
Management accounting report: It is the process which includes the financial accuracy
which helps the manager to develop report which further required for the decision making
process. This report can be prepared on daily, weekly, monthly or quarterly basis. Basically, it is
used by the internal stakeholders for the future decision. There are different types of
management accounting reports which can be used by the organization and it will be discussed
below:
Budget report: It is an estimation report which includes the revenues as well as
expenditure. With the help of this report, organization identifies the different among the
estimated cost and actual expenditure. So manager of Heatrod elements ltd can use this report for
the estimation of the organizational expenses or revenue (Hilton and Platt, 2013). It is manager’s
responsibility to perform as per the budget, for this they have to build strategy execute in proper
way so they can achieve business goals & objectives. Budgets are essential required for maintain
their reserve to meet their future contingencies.
Performance report: This report includes the individual performance of employees as
well as whole organization. With the help of this, manager identifies the difference between the
budgeted and actual outcome. This report helps the manager to identify individual performances
which further helps in providing various incentives or compensation. So manager of Heatrod
Elements Ltd, use this report to identify every department performance then provide training for
the necessary improvement. It is beneficial for the organization to identify performance which
further helps in taking effective decision.
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Inventory management report: Under this report, organization develops an estimate of
total cost and expenditure before starting any project. In this reporting, organization provides the
rank to the inventory as per the quality, demand or price. With the help of this, managers identify
the inventory level and its requirement as per the demand. Manager of Heatrod elements ltd, use
this report and order the inventory as per the requirement of production. It will further help in
building strategy and taking effective decision. This budget can be prepared on monthly,
quarterly or yearly basis for the future activities.
P3 Calculating cost by using appropriate costing techniques
Marginal Costing: In this costing method, variable cost is charged as per every extra unit
produce and fixed costs are not considered in this method (Hopper and Bui, 2016). It includes the
cost of material, labour, selling & distribution overhead, office & administrative expenditure,
production & manufacturing expenses which are applicable in term of the valuation of
production cost. Some of the calculation mentioned below:
Statement of Profit & Loss accounts of January 2019
Absorption Costing: This method used for the calculation of each unit cost which
includes the direct or indirect expenses. As per this concepts, costing include all the variable as
well as fixed cost which assign for the production for the specific time duration. Here is some
calculation of cost with the help of absorption costing method.
B. Absorption Costing
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Particulars
PER
UNIT Budgeted Actual- Q1 Actual- Q2
80000
Sales Revenue 1 80000 66000 74000
COST OF SALES
Cost Of Production: Variables
Direct Material 0.65 52000 50700 42900
Opening Inventory 0 0 7800
Less : Closing Inventory 0 52000 7800 42900 2600 48100
.

Statement of profit or loss for
January2019
PER
UNIT Budgeted Actual- Q1 Actual- Q2
80000
Sales Revenue 1
8000
0 66000 74000
COST OF SALES
Cost Of Production: Variables
Direct Material 0.65 52000 50700
4290
0
Fixed Overheads 0.2 16000
1600
0 16000
1600
0
Opening Inventory 0 0
1020
0
Less : Closing Inventory 0
5200
0 10200 56500 3400 65700
CONTRIBUTION
2800
0 9500 8300
Fixed selling and administration costs 5200 5200 5200
Profit 6800 4300 3100
Above mention calculation represented that, profit or loss of the organization will be
same on yearly basis but changed in the quarterly basis due to different methods such as
marginal or absorption methods. By using marginal methods, profit of the quarter 1 is 1900 and
second quarter is 4700. On the other hand, by using absorption method profit of quarter 1 is 4300
and second one is 3100. Both are different because marginal costing does not include the fixed
cost and absorption costing includes the all types of costing.
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P4 Advantage or disadvantage of different types of planning tools
As a newly qualifies management accountant for the Nero Ltd, they have to produce report
for the line manager which includes the various planning tools to maintain financial mutability.
Budget: It is the estimated report which includes the overall expenditure for the specific
time period. It includes the various resources which required for the completion of task along
with estimated expenditures. In other words, budget is the plan to spend the money on their
expenses and it is a kind of financial statement. In the Nero Ltd, manager use to prepare financial
budget which further classified into various budgets such as assets, liabilities, cash flows, sales,
purchase, resources etc.
Budgetary control: It is the process of controlling budget where they try to reduce or
control the production cost by following budget. It includes the regular review so if any
improvement required then they can change as per the requirement of the production. Manager
of Nero Ltd take regular review of their budget and them compare actual expenses with standard
one (Lavia and Hiebl, 2014).
There are various types of budget which can follow by the organization in order to
complete their business activities as per the budget. Some of them discussed below with their
advantage or disadvantage.
Operating budget: It is the budget which includes the individual item costs over the
revenue. Basically, it is developing for the fixed period of time and it can be quarterly, half
yearly or annual basis.
Advantage:
 It helps the organization to complete their task on deadlines.
 It helps in increasing coordination among different functions.
 It provides necessary information which helps in identifying organizational strengths &
weaknesses.
 Problems can be identified on time and try to resolve it before taking further time.
Disadvantage:
 Sometimes it is difficult to estimate the accurate information.
 It will de-motivate the employees when organization set the higher standards which are
not too easy to.
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 Due to lack of communication, it will develop confusion among the different
departments.
 This budget will take lots of time to analyse the final outcomes which is not beneficial for
the Nero Ltd.
Master budget: It is the combination of various department budgets which includes all the
level of divisional that’s why it is called master budget. It is the summery of the entire budget
which prepared for the annual basis and it also have some advantage or disadvantage.
Advantage:
 It helps the manager to take overall review of the budget (Leitner, 2013)(Modell, 2014).
 It provides the resources to each department as per their requirements.
Disadvantage:
 It contains information regarding each division and doesn't provide few information for
the lower budgets.
 It is very difficult to change master budget because it will take time as well as lots of
efforts.
Nero Ltd can use this budget for the each divisional function of the organization and it
has their own advantage and disadvantage.
Cash budget: This budget includes the estimates of cash revenue and expenditures of a
particular time period. Cash budget will be prepared after preparing all the budgets such as sales,
purchase, capital etc. It includes all the revenue receipts and payments which help the manager to
develop accurate cash budget. It will be developed for the external users such as their
stakeholders. All the changes will be done before publishing because after this, it is impossible to
change.
Advantage:
 It helps the organization to reduce their cost or maximise the profit margin.
 It helps in maintaining liquidity of cash as well as requirement.
 It forces the manager to think critically and predict the future events regarding financial
situations.
Disadvantage:
 It is very difficult for manager to analyse cash budget because it does not include non-
financial elements.
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 Under this budget, figures can easily manipulate for the profitable motives (Nielsen,
Mitchell and Nørreklit, 2015). So, manager have to ensure that people not manipulate the
figures because it can change the financial position of the company.
Pricing strategy: In the organizational context, every company use different types of pricing
strategy which help them to increase their demand as well as productivity. It also helps the
organization to evaluate each activity cost. Manager of Nero Ltd, follow two types of pricing
strategy which help them to recover all the manufacturing cost and further generate the profit.
This strategy helps in competitive advantage and satisfies the customer’s demand through
offering effective products & services. There are two methods which are mentioned below:
 Cost plus pricing: It is important pricing method which is followed by the Nero Ltd for
fixing product cost at the time of manufacturing. It includes all the variable or fixed cost
such as cost of labour, material, overheads etc. These expenses could be recovered
through selling or distribution of products.
 Full costing pricing: It is the another pricing method where all the cost add together
material, labour, overhead, selling & distribution cost and then add extra margin for the
profit and then set the price of product. Here, profit margin already decided which added
in the cost and then set the price of goods for the sale (Senftlechner and Hiebl, 2015).
Above mention pricing methods, used by the Nero ltd for the effective pricing strategy it will
meet with customer’s requirements. Along with this, it meets the business goals & objectives
which further helps in increasing productivity or profit margin.
Balance score card: It is the strategy management tool which is used by the manager to
track regular operational activities and employees’ performance. With the help of this, they can
face the various issues which generated in the organization and affect the business in terms of
production or profitability. So manager of Nero ltd used this method to resolve internal issues. It
will increase the efficiency as well as effectiveness.
P5 how management accounting helps in solving financial problems
Management accounting helps the organization to solve financial issues which affect the
production and profitability as well. This is because, it consists different types of tools and
techniques which help the organization to overcome from financial problems.
Financial problems: This problem is related to the finances where organization has to face
various monetary issues. So managers have to use various tools and techniques which help in
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reducing these problems. There are some financial issues faced by the Nero ltd are discussed
below:
Expenses are more than revenue: In the organization, cost of product will increase which
reduce the profit margin. At the end, business not able to recover their cost and it become
expensive to for the business (Soin and Collier, 2013).
Uneven cash flow: It is very important for the organization to match their inflows or
outflows. If it is not happen then it will develop financial crises for the organization.
Methods of solving financial problems:
Key performance indicator (KPI): It is the technique which majorly focuses on those
activities which generate profit for the organization. Manager eliminate those activities which is
not generate any king of profit. By using this technique Nero Ltd can face the financial problems
of spending more than their earning (Ward, 2012).
Benchmarking: Under these technique, manager compares their organizational rules,
policies and standards with other company. It will help the manager to identify their operational
issues which develop problem. It further affects the productivity or profitability of the
organization. With the help of this tool, organization resolve the excess expenses problem which
affect the organization in terms of reducing their profit margin.
Financial Governance: It is the governance body which control, collecting, monitoring
and managing the financial transactions. It plays important role in the organization to resolve
their internal financial problems. Basically it is work as strategic management which help the
manager to find financial problem. For example: uneven cash flow or over expenses these
problems faced by the organization. So with the help of various techniques they resolve these
financial problems.
Management accounting helps in resolving financial problems:
Basis Nero Ltd TPG processing
Financial Problems Company spend more than it’s
earning because cost of producing
goods is very high which not able
to recover cost. It means that, cost
of producing goods is very
expensive. But they do not get
Company face the unequal
cash flow in the organization
which develop the financial
problems (Wickramasinghe
and Alawattage, 2012).
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proper profit.
Management accounting
system
To resolve their financial issues,
organization has to adopt
management accounting system
which helps in overcome this
situation. Cost accounting system
helps in maintain systematic
record of those items which is
related to the promotional activity
and reduce the non valuable
activities which reduce the cost. It
helps the manager to increase their
organizational efficiency or
effectiveness which generate more
profit which help the business to
achieve their tasks & objectives.
For solving this issue, manager
of this company use the
inventory management system
which help the organization to
maintain their inventory level.
With the help of this they can
overcome from unequal cash
flow. So this accounting
system helps the manager to
resolve this issue and increase
the productivity or
profitability. It further helps in
achieving their business goals
& objectives.
CONCLUSION
From the above discussion, it has been analysis that management accounting helps the
organization to increase their efficiency or effectiveness. It further helps the manager to take
effective decision or develop strategy for achieving business goals & objectives. Management
accounting system helps in improving their operational functions which reduce the cost and it
will directly increase the productivity or profitability. In addition, with the help of accounting
reports, manager identifies the performance of individual and the organization. Along with this,
different planning tools help in solving financial problem of the organization.
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REFERENCES
Books & Journals
Abdel-Kader, M.G. ed., 2011. Review of management accounting research. Springer.
Akbar, S., 2010. Management accounting change: a comparative study of Indian and UK
organisations. Journal for Global Business Advancement. 3(1). pp.1-27.
Callahan, K. R., Stetz, G. S. and Brooks, L. M., 2011. Project Management Accounting, with
Website: Budgeting, Tracking, and Reporting Costs and Profitability (Vol. 565). John
Wiley & Sons.
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research. 31. pp.10-30.
Lavia López, O. and Hiebl, M. R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research. 27(1). pp.81-119
Leitner, S., 2013. Information Quality and Management Accounting: A Simulation Analysis of
Biases in Costing Systems (Vol. 664). Springer Science & Business Media.
Modell, S., 2014. The societal relevance of management accounting: an introduction to the
special issue. Accounting and Business Research. 44(2). pp.83-103.
Nielsen, L. B., Mitchell, F. and Nørreklit, H., 2015, March. Management accounting and
decision making: Two case studies of outsourcing. In Accounting Forum (Vol. 39, No.
1. pp. 64-82). Elsevier.
Senftlechner, D. and Hiebl, M. R., 2015. Management accounting and management control in
family businesses: past accomplishments and future opportunities. Journal of
Accounting & Organizational Change. 11(4). pp.573-606.
Soin, K. and Collier, P., 2013. Risk and risk management in management accounting and
control.
Ward, K., 2012. Strategic management accounting. Routledge.
Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches
and perspectives. Routledge.
OnlineHeatrod Elements Ltd. 2019. [Online]. Available through:
<https://companycheck.co.uk/company/00766637/Heatrod ELEMENTS-LIMITED/companies-
house-data>.
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