Management Accounting and Control Techniques

This assignment discusses the importance of management accounting in businesses, covering various methods and techniques used to prepare income statements and identify inefficiencies. It highlights the need for effective managerial functions and the use of planning tools and cybernetic tools to evaluate control systems. The study also touches on the significance of performance measurement systems and the benefits of financial budgeting in business.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
1. Management accounting and its essential requirement of the management accounting
system..........................................................................................................................................1
2. Explaining different methods of the management accounting reporting................................3
LO 2.................................................................................................................................................5
3. Preparation of income statement using different management accounting techniques..........5
LO 3.................................................................................................................................................6
4. Explaining advantages and disadvantages of various planning tools of the budgetary control
system .........................................................................................................................................7
5. Explaining various management accounting system as to help the company in responding
to various financial problems......................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is a branch of accounting that is concerned with providing all
the relevant information to the managers of the company. It is a process which requires
professional skills of the accountants so that they can provide all the relevant financial
information to the managers and helping them in their decision making procedure. Captify is a
middle sized manufacturing company of UK. It was established in 2011. The present assignment
shows a report of an assistant accountant of the Captify, that provides a brief information about
the management accounting its essential requirement in the business along with the benefits of
various management accounting systems and their applications within the business. Further, the
study also shows numerous methods to be used for the management accounting reporting. An
explanation about various planning tools of the budgetary control system and about adoption of
various management accounting system and their usefulness in the business as to resolve various
financial problems of the company. In addition, the study also shows preparation of the income
statement of the company using different techniques of the management accounting
LO 1
1. Management accounting and its essential requirement of the management accounting system
Captify
To,
the line manager,
subject: For providing information about the role and functions of management accounts
department.
Management accounting
“The management accounting system can be defined as a process of analysing the cost
and financial activities of the business and preparing financial reports from those informations
as to help the managers in taking their decisions relating to the cost and financial activities of
the business, as to strengthen the financial capacity of the business. (Otley, 2016)”
In other words, it can also be defined as a systematic procedure through which the
business can develop effectiveness and efficiency in the business as to make the best use of the
financial resources like cash, inventories, etc. of the business.”
Management accounting system
“Management accounting system refers to a process in which the financial managers
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analyse and evaluate all the financial activities of the business and prepares a detailed report
that
can provide all the detailed information to both internal and external users of the company.”
There are various management accounting systems like cost accounting
system,inventory management system, job costing system, etc. that can be adopted by the
company for the purpose of developing effectiveness in the overall business organisation.
Essential requirements of management accounting system
 Cost accounting system: Cost accounting system is that type of management
accounting system that helps the overall business in estimating the cost to be incurred by
the business and determine the actual cost of the business as well. This system helps the
company in developing the cost effectiveness in the overall business operations. This
system is required by the those business that are engaged in manufacturing products or
renderning services to the customers.
Requirements
▪ This system helps the business in making the company more cost effective.
▪ It helps the managers in having effective analysis of the cost related activities
and develop more strong strategies for the company accordingly.
▪ With the help of it, company can determine the cost incurred by the business for
manufacturing each product or rendering each services to the customers (Maas,
Schaltegger and Crutzen, 2016). In this regard, the firm can determine the
appropriate price of the product or services.
▪ Further, this system also helps the managers in predicting the requirement of
resources in the firm in the near future. With the help of which they can maintain
sufficiency of the various financial resources of the business.
 Inventory management system: Inventory management system can be defined as a
process of management in which they monitors the usage of inventories of the business
and develop strategies and plans for the business. This system helps the managers in
developing effectiveness in the business for using its inventories. This system is Useful
for those businesses that needs to maintain the inventories either for the further
processing and manufacturing goods or for their further sale.
Requirements
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▪ It enables the managers in monitoring the use of inventories in the business.
▪ With the help of this system, managers can maintain the sufficiency of the
inventory in the business by determining the minimum need of the stock in the
firm.
▪ Further, this system also result in elimination of the excess or shortage of the
inventory in the business.
▪ The inventory management system also leads in eliminating wastage of the stock
from the business by monitoring each flow of the inventory in the company.
 Price optimisation system: Adoption of this system of the management accounting can
help the managers in effectively setting the price of their products or services. In this
system, the managers analyses the cost of each product and sets the price in such a way
so that the company could generate enough profit from its selling and customers also
gets ready to pay such price for the product (Modugno and Di Carlo, 2019). This
system is required by all the businesses, as each company needs to set the price of their
product or services.
Requirements
▪ It helps the company in generating sufficient profit from the business operations.
▪ This system may result in attracting the customers towards the company's
product due to setting of the most appropriate price of the product.
▪ It may result in improving the profit making policies of the firm.
2. Explaining different methods of the management accounting reporting
Management accounting reporting
management accounting reporting is a part of management accounting in which various
financial accounting reports are prepared by the business in order to summerise all the financial
transactions of the company.
The management accounting reporting is required by all the firms as to provide all the
relevant information to the internal and external users of the financial reports. With the help of
these reports, the internal users of the company i.e. managers can effectively analyze the actual
position of the company and develop[p their strategies accordingly. Further, with the help of
these reports the external users like creditors, suppliers, investors, etc. can take their decisions
for the company.
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Methods of management accounting reporting
There are various methods through with the help of which the managers can prepare
various management accounting reports (Hopper and Bui, 2016). Some of the important
methods of management accounting reporting are as under:
 Budget reports: These are the reports that provides the information about the estimated
activities of the company. With the help of these reports the managers can maintain
sufficiency of each resources of the company. Further, by comparing these reports with
the actual performance of the firm, the managers can analyse the efficiency of the
business and develop more effective strategies and plan for the company as well.
 Financial reports: Financial reports of the company contains information about all the
financial transactions of the business. With the help of these reports, the managers can
analyse all the activities of the business (TYPES OF MANAGERIAL ACCOUNTING
REPORTS, 2019). These provides all the relevant information to the managers which
are required by them as to analyse overall performance of the business.
 Performance reports: These reports includes information about the overall
performance of the business. These reports are prepared by comparing the actual
performance of the business with the budgeted performance.
 Cost reports: Cost reports are those reports that provides information about all the costs
incurred by the business in performing its normal course of actions. Cost reports are
useful for the managers to determine the need of the funds and other financial resources
in the business and developing their strategies to make the company more cost effective.
In this regard, the management accounting reporting is also an essential part of the
management accounting.
Critical evaluation of management accounting system and management accounting
reporting
Both management accounting system and management accounting reporting helps the
business in maintaining the efficiency in all the operations of the company. Adoption of
management accounting system and preparing management accounting reports can help the
managers in enhancing its financial position in the market.
On the other hand, if the company wants involve the management accounting system
and management accounting reporting in the business, it has to incur a huge expenditure in this
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regard.
From the above analysis it can be evaluated that although management accounting
reporting and management accounting system needs a huge cost and time of the managers as
well, but with the help of these systems, the company can enhance its ability to generate more
profit from the business operations through which the even the extra cost incurred by the
business could be easily recovered.
LO 2
3. Preparation of income statement using different management accounting techniques
There are different techniques that can be adopted by the finance managers for the
purpose of preparing their financial reports. Although, due to the difference in the methods of
calculations, each technique may provide different result of profit for the business.
The main techniques of management accounting for preparation of financial reports are
as under:
 Marginal costing: It is the method in which while determining the cost of production,
each variable cost incurred by the business are considered as the product cost and all the
fixed costs are considered as the period cost (George, 2016). Due to exclusion of fixed
cost from the product cost, this methods results in providing higher amount of profit for
the business.
 Absorption costing: Absorption costing is that method of management accounting in
which each cost incurred by the business while producing the products or services are
being considered as the product cost and included in the calculation of the cost of
production. In this regard, this method provided lower amount of profit to the company.
Calculation of cost of production
Particular Marginal cost (£) Absorption cost (£)
Material cost per unit 4 4
Labour cost per unit 4 4
Variable cost per unit 2 2
Fixed production overhead 1.25
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Other fixed overheads 2.5
10 13.75
Income statement from marginal costing technique
Particulars Amount
Sales £600,000.00
Less: Material cost £160,000.00
Labour cost £160,000.00
£280,000.00
Variable cost £80,000.00
Contribution £200,000.00
income statement from absorption costing technique
Particulars Amount
Sales £600,000.00
Less: Material cost £160,000.00
Labour cost £160,000.00
Gross profit £280,000.00
Variable cost £80,000.00
Fixed production cost £50,000.00
Other fixed costs £100,000.00
Net profit £50,000.00
Interpretation
From the above calculations it can be analysed that in the marginal costing method, the
fixed cost are not considered while calculating cost of production. On the other hand all costs od
production are considered while calculating the cost of production in the absorption costing
method. Further, the marginal costing provides higher amount of profit than the absorption
costing technique.
Captify
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To,
the line manager,
subject: For providing information about the role and functions of management accounts
department.
LO 3
4. Explaining advantages and disadvantages of various planning tools of the budgetary control
system
Budgetary control system
Budgetary control system is also a part of management accounting which concerns with
forecasting various activities of the business. In this system, the managers prepares budgetary
reports as to estimate various activities of the company (Van Erdeweghe, Van Bael and
D’haeseleer, 2019). Involvement of this system enables the business in maintaining the
sufficiency of various business resources as to maintain the smooth running in the company.
There are some planning tools that can be used by the business for the budgetary control
system. Some planning tools of budgetary control system along with their advantages and
disadvantages for the business organisation are as under:
 Operating budget: It is the most important planning tool of the budgetary control
system. This budget helps the managers in making plan for the purpose of enabling the
business in paying all the debts. This budget forecasts the future debets that could be
occurred in the business. With the help of this analysis, the manager5s can maintain
sufficient funds in the business so that company cfan pay its debts easily.
Advantages Disadvantages
It enables the business to pay all the debts. This budget turns the operations of business
quite rigid.
With the help of this budget,. Managers can
determine the need of funds and other
financial resources in the business (Herath and
Lu, 2018).
This budgetary report fails if any new project
is being added in the company.
 Cash budget: It is another planning tool of the budgetary control system with the help
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of which the company can monitor the flow of cash in the business. It helps the
managers in determining the need of cash in the business during a specific time period
(O’Grady, Morlidge and Rouse, 2016). Further, it also enables the managers in
determining where and how the cash is being used by the company in its business
operations.
Advantages Disadvantages
It enables the managers in monitoring the flow
of cash in the overall business organisation.
The cash is the most uncertain resource of the
business. Therefore, it may provide negative
results to the managers.
It helps the managers in determining the need
of cash in the business so that they can
maintain sufficient amount of cash in the
company.
Cash budget can not be prepared for the long
term. Therefore, company needs to prepare it
frequently.
 Activity based budgets: This planning tool of the budgetary control system helps the
analysing, summerising and monitoring each activity of the company. It is the most
appropriate planning tool of the budgetary control. Although, not each business prepares
this budget, as, it requires professional skills of the managers.
Advantages Disadvantages
With the help of this budget, managers can
monitor each business operations.
Preparation of this budget requires a huge
cost.
The activity based budgeting helps the
managers in developing more effective plans
and strategies for each activity of the firm.
Managers need to have professional skills for
the purpose of preparing this budget.
 Financial budget: Financial budget is the report that estimates various financial
activities of the company (Financial Budget Benefits in Business, 2018). By comparing
this financial budgets with the actual financial reports, the managers can determine the
efficiency of the business and develop their strategies and plans accordingly as to
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enhance the financial capacity of the business.
Advantages Disadvantages
This planning tool sets a short term goal of the
business as to perform its financial activities.
This budget needs lots of prediction of the
managers.
It results in generating financial awareness in
the company.
It is also an uncertain budget due to inclusion
of a huge amount of prediction of the
managers. Therefore, it may provide negative
results to the company.
In this regard, it can be analysed that there are various planning tools of the budgetary
control system that helps the managers in their decision making process. As these budgets,
provides an estimation of various business operations, enables the managers in making
sufficient resources available for the business operations of the company.
5. Explaining various management accounting system as to help the company in responding to
various financial problems
 Key performance indicators: It is the management accounting system in which the
managers analyses overall performance of the business (Pellinen, Teittinen and
Järvenpää, 2016). Adoption of this system makes each department of the company along
with the managerial department, to measure their own performances.
In this order, each business operation of the business could be measured effectively and
inefficiency in the business could be determined as well by comparing them with the set
objectives of each department. In this regard, all the future problems can be determined in
advance and company can develop policies for them advance.
 Balance score card: In this technique, the managers interrelates all the activities of the
business and creates a different perceptive towards the business operations. When the
managers identifies any inefficiency in the firm, due to the interrelation, they can easily
determine all the problems that can be arisen due to that. In this regard, the managers it
also helps in solving various financial problems effectively.
 Bench marking: By using this technique, the managers selects some major
departments of the company like, purchase department, sales department, cash
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department, etc. and starts managing those selected departments only.
In this order, this technique reduces the burden of managers and enhance and enhance their
efficiency as well (Chiarini and Vagnoni, 2015). Financial problems are detected by
identification if inefficiency in any of the selected department and develop plans and strategies
for that as well.
In this order, these management accounting techniques helps the managers in enabling
the business as to respond to various financial problems by detecting them in advance and
develop plans for them as well.
CONCLUSION
From the above study, it can be analysed that the management accounting system is an
important part of the company. Involvement of management accounting system and management
accounting reporting can help the business in enhancing their financial capabilities. Further, there
are various methods of preparing income statements of management accounting. A business
should choose the most appropriate method to get the best results. Further, there are various
planning tools with the help of which managers can effectively perform their managerial
functions. The study has also concluded that there are numerous techniques with the help of
which the company can effectively identify the inefficiency in the business and become able to
effectively respond to various financial problems.
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REFERENCES
Books and journals
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Modugno, G. and Di Carlo, F., 2019. Financial Sustainability of Higher Education Institutions:
A Challenge for the Accounting System. In Financial Sustainability of Public Sector
Entities(pp. 165-184). Palgrave Macmillan, Cham.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research. 31. pp.10-30.
George, T., 2016. MANAGEMENT ACCOUNTING AS AN ELEMENT OF THE
ACCOUNTING SYSTEM IN THE MODERN CONDITIONS. International scientific
review, (6 (16)).
Van Erdeweghe, S., Van Bael, J. and D’haeseleer, W., 2019. Costing methods for combined
heat-and-power plants fueled by zero-marginal cost energy sources. Energy Conversion
and Management. 187. pp.122-132.
Herath, H.S. and Lu, X., 2018. Inference of economic truth from financial statements for
detecting earnings management: inventory costing methods from an information
economics perspective. Managerial and Decision Economics. 39(4). pp.389-402.'
O’Grady, W., Morlidge, S. and Rouse, P., 2016. Evaluating the completeness and effectiveness
of management control systems with cybernetic tools. Management Accounting
Research, 33, pp.1-15.'
Pellinen, J., Teittinen, H. and Järvenpää, M., 2016. Performance measurement system in the
situation of simultaneous vertical and horizontal integration. International Journal of
operations & production management. 36(10). pp.1182-1200.
Chiarini, A. and Vagnoni, E., 2015. World-class manufacturing by Fiat. Comparison with
Toyota production system from a strategic management, management accounting,
operations management and performance measurement dimension. International Journal
of Production Research. 53(2). pp.590-606.
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Online
Financial Budget Benefits in Business. 2018. [ONLINE] Available through
<https://bizfluent.com/info-8014791-financial-budget-benefits-business.html>
TYPES OF MANAGERIAL ACCOUNTING REPORTS. 2019. [ONLINE] Available through
<https://www.completecontroller.com/types-of-managerial-accounting-reports/>
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