Management Accounting: A Comprehensive Analysis of its Role, Systems, and Planning Tools

This study delves into the multifaceted world of management accounting, exploring its crucial role in organizational success. It examines the key functions of management accounting, including cost control, inventory management, and planning, and analyzes the effectiveness of various systems like absorption costing and marginal costing. The study also evaluates the efficacy of three prominent planning tools: responsibility budgeting, standard costing, and net present value (NPV), providing insights into their strengths and limitations. By analyzing the financial statements of Tate and Lyle and Kerry Group Plc, the study provides a comparative analysis of their financial performance using key performance indicators and financial ratios.

Management Accounting

Table of contents
Introduction................................................................................................................................3
Task 1.........................................................................................................................................4
1. An explanation of the role of management accounting and management accounting
systems.......................................................................................................................................4
2. Explanation of how management accounting is integrated within an organisation...............5
3. The benefits of the function to the organisation.....................................................................6
Task 2.........................................................................................................................................8
A. Select two competitor organisations. Find the last three years of the organisations’
financial statements and analyse them with key performance indicators and appropriate
financial ratios............................................................................................................................8
B. Absorption costing and Marginal costing............................................................................11
(i) Absorption Costing..............................................................................................................12
(ii) Marginal Costing................................................................................................................13
Task 3.......................................................................................................................................14
Compare and contrast three planning tools used in management accounting, indicating how
effective you judge each to be and why. Your judgements should be supported by evidence 14
Conclusion................................................................................................................................17
Reference list............................................................................................................................18
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Introduction
The term “management accounting” indicates a particular system that takes care of not only
the financial activities, but the non-financial activities also. Management accounting is
considered to be one of the biggest organizational systems that influence growth of the
business (Ahmad, 2017). Here, in this study, the effectiveness of management accounting
will be analyzed in organizational context. At the same time, the study will also evaluate the
use of different systems under the management accounting like, cost accounting system and
inventory management system. Moreover, different planning tools under the management
accounting system will also be evaluated.
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Task 1
1. An explanation of the role of management accounting and management accounting
systems
If management accounting in the organizational context is analyzed, the following key roles
will be identified:
 Management accounting is a major player in the cost controlling system of the
business. Providing different cost accounting methods, management accounting helps
the organization controlling its cost to a standard level. There are several cost
accounting systems can be identified under management accounting like, marginal
costing system, absorption costing system and job-costing system (Ismail et al.,
2018).
 The role of management accounting is also very significant in development of
organizational plans. As the system has enough access to different organizational
activities, it is able to understand the overall situation of the business (Ax and Greve,
2017). Due to this, under the management accounting system, developing the business
strategies or plans becomes easier.
 Management accounting also plays vital role in inventory management. Under this
system, managers get access to different techniques of inventory management. Using
those techniques, managers can easily control the flow of inventory in the business,
which is essential for maintaining standard level of sales (Booth, 2018).
There are several systems under the management accounting and these systems are discussed
below:
Cost accounting system – It has been stated above that controlling the cost level of the
business is one of the major roles that management accounting plays in the business. Cost
accounting system helps management accounting in this context (Lanen, 2016). Analyzing
each business related cost, this system of management accounting helps in making const
controlling decisions and strategies.
Inventory management system – This is another vital management accounting system. The
primary aim of inventory management system is to help the organization maintaining
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standard level of inventory and sales in every financial year. The inventory management
system is very important for maintaining standard liquidity level in the business (Ax and
Greve, 2017). The techniques that management accounting suggests for better inventory
management are – FIFO, AVCO and LIFO.
Job-costing system – If the organization is a large production or manufacturing company,
job-costing is the most useful system for the company. Job-costing helps the organization
dividing its production and operational activities into small parts, which are known as jobs
and then analyzing and controlling the same (Booth, 2018). It makes large business process
easier for the managers.
Price optimization system – A business can sell its products efficiently only if the price level
of the products and services is standard. Price optimization system is such a system that can
help the company in this context (Ismail et al., 2018). Under this system, determining the
right price level becomes easier because this system determines the price after analyzing
internal and external business scenario.
2. Explanation of how management accounting is integrated within an organisation
As stated above, management accounting plays a major role in the growth of a company. This
is clearly indicating is management accounting is largely associated with organizational
activities. However, in order to understand how management accounting is integrated within
an organization, it is important to critically analyze the management accounting system of an
organization.
Management accounting takes care of non-financial as well as financial activities of the
business. Efficiency level of the employees is one of the key non-financial aspects of the
business. Management accounting takes care of this particular aspect of the business. Under
the management accounting system, the managers need to prepare the performance appraisal
reports, in which the performance standards of the employees are mentioned. This report
indicates the performance gaps, considering which the managers can develop strategies for
improving the efficiency level of the employees.
On the other hand, if the financial aspects are considered like, cost of the business,
management accounting provides the techniques that can help the firm identifying the right
costing technique for the business. This on the other hand helps to control the cost level of the
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business more efficiently. Similarly, management accounting also provides different methods
for managing inventory level of the firm. The FIFO, LIFO and AVCO methods are under the
management accounting system and these techniques efficiently manage the inventory level
of the business.
It has been mentioned before that under the system of management accounting different
reports are required to be prepared. Each of these reports indicates different areas of business.
For example, sales report, production report, capital budgeting report and many others show
the performance standard of the business in different departments.
Therefore, from the overall discussion and evaluation, it must be stated that management
accounting is closely integrated with the organizational system of a firm.
3. The benefits of the function to the organisation
There are several benefits of using management accounting techniques or incorporating
management accounting system in the business. The benefits of the functions of management
accounting to the organization are stated below:
 One of the key functions of management accounting is developing better plans for the
business. With the help of this particular management accounting function, the
managers in the firm become able to develop advanced strategies for the operations
because while developing plans management accounting encourages the managers for
analyzing the business situations critically, which makes the strategy development
process easier.
 Forecasting is another key function that management accounting performs. With the
help of forecasting, the managers can arrange the required amount of resources for the
future days, so that the business does not face any trouble during the operations.
 Organizing is also a function of management accounting. The primary benefit of
organizing is that it helps the managers operating business activities in a systematic
manner. In the other words, it can be stated that organizing the activities the business
process becomes easier to the managers.
 Management accounting is helpful in co-ordinates the activities of different
organizational departments. Preparing different organizational reports, management
accounting creates strong communication among the departments. The main benefit o
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better co-ordination is that the managers can easily make decisions regarding business
activities.
 Cost controlling is another major function that management accounting does. The
benefit of cost controlling is that the firm gets the scope of enhancing profit or income
level of the business. This makes the financial health of the business stronger.
 Management accounting protects the assets of a firm, which is important for
maintaining a strong financial position in the market.
Therefore, considering the above points, it can be stated that each function of management
accounting is important to the firm. The functions of management accounting make the
business process easier and help to create a strong position of the company in the market.
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Task 2
A. Select two competitor organisations. Find the last three years of the organisations’
financial statements and analyse them with key performance indicators and
appropriate financial ratios
Financial statement analysis is important because it helps to understand the financial capacity
of the business during a specific time span. Here, the financial statements of Tate and Lyle
and Kerry Group Plc have been analyzed in order to understand the performance standards of
the two firms. At the same time, the financial performances of the two firms have been
compared to understand, which firm has performed better. Last three years’ financial data has
been used for the purpose of analyzing the financial positions of the two firms.
Financial ratios of Tate and Lyle:
Profitability ratios 2017 2016 2015
Operating profit ratio 8.46349
5.3927
8 10.6537
Net profit ratio 9.29895
6.9214
4 1.27334
Liquidity ratios: 2017 2016 2015
Current ratio 2.10472
1.6369
2 1.32102
Quick ratio 1.19918
1.1923
1 0.8054
Efficiency ratio: 2017 2016 2015
Inventory turnover 5.71429 7.7093 5.7989
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ratio 4
Assets turnover ratio 0.09239
0.0638
2 0.01238
Gearing ratio: 2017 2016 2015
Debt to equity ratio 0.71471
0.8503
4 0.83654
Debt to assets ratio 0.34356 0.3426 0.32315
Investment ratio: 2017 2016 2015
EPS 0.55 0.26 0.66
P/E ratio 12.5455
23.192
3 9.62121
(Source: Tateandlyle.com 2018)
Financial ratios of Kerry Group Plc:
Profitability ratios 2015 2016 2017
Operating profit ratio 11.54 11.24 11.01
Net profit ratio 9.87 9.98 9.57
Liquidity ratios: 2015 2016 2017
Current ratio 1.25 1.32 1.3
Quick ratio 0.69 0.85 0.75
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Efficiency ratio: 2015 2016 2017
Inventory turnover
ratio 7.53 4.48 6.9
Assets turnover ratio 0.94 0.85 0.86
Gearing ratio: 2015 2016 2017
Debt to equity ratio 0.72 0.6 0.48
Debt to assets ratio 2.51 2.4 2.07
Investment ratio: 2015 2016 2017
EPS 2.99 3.03 3.34
P/E ratio
20.538
5 24.6535 20.003
(Source: Kerrygroup.com 2018)
Considering the calculations under the above two tables, it can be stated that the profitability
position of Kerry Group Plc was bit better than the profitability of Tate and Lyle. However, it
is also noticeable that the differences between the profitability ratios of the two firms were
not so high. At the same time, it is also noticeable that the companies could not attain the
industry standard in terms of operating profit and net profit ratios.
On the other hand, considering the liquidity scenarios of the two firms, it can be mentioned
that liquidity position of Tate and Lyle was far better than the liquidity position of Kerry
Group Plc. It means the working capital position of Tate and Lyle was better than the other
company. This is good for Tate and Lyle to have strong liquidity during these years. Strong
liquidity position indicates secured short-term solvency of the business.
Considering the efficiency ratios of the two firms again it can be stated that the performance
of Kerry Group Plc was better than that of Tate and Lyle. Strong efficiency is very important
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utilizing the assets and other resources of the business effectively. However, in this context, it
must be stated that efficiency ratios of the two firms were not much high, which indicates that
improvements are required.
Considering the gearing ratios of the two businesses, it can be stated that both the companies
have used more debt capital than equity capital. However, the use of debt capital has
decreased in both the companies from 2015 to 2017. It means the financial risk associated
with capital structure has reduced during these years. However, if the concentration is made
on the debt to assets ratios, it can be identified that the Kerry Group Plc has used more debt
capital in its assets, which has increased the risk level of the assets.
If the investment ratios are considered, it will be noticed that Kerry Group Plc has performed
better than Tate and Lyle. Better investment ratios indicate that the company has satisfied its
stakeholders in a better way than Tate and Lyle. This is good for future growth of the
business. However, the investment ratios of Tate and Lyle were not so low.
Therefore, from the overall analysis, it can be stated that the performance of Kerry Group Plc
was better than the performance of Tate and Lyle. However, in order to understand the
performance standards of the two companies in a better way, it is important to analyze their
key performance indicators.
One of the major key performance indicators is the net profit of the business. Considering the
net profits of the two companies, it can be stated that the net profit of Tate and Lyle was
lower than its competitor Kerry Group Plc, which indicates that the performance of Kerry
Group Plc was better than that of Tate and Lyle. Another key performance indicator is the
cost of sales of the companies. In this context, it must be stated that the cost of sales of the
two companies was higher, which means the cost controlling systems of the companies must
be improved.
Therefore, from the overall discussion, it can be stated that the performance standards of both
the companies are needed to be improved as soon as possible. The managements in both the
companies need to take special care of the profitability positions of the businesses in the
coming financial years.
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B. Absorption costing and Marginal costing
Under the management accounting system, there are several costing techniques; however,
absorption costing and marginal costing are the two most popular costing techniques
available to the company. These two costing techniques and their uses are stated below:
Absorption costing – This is one of the traditional costing techniques under the system of
management accounting. In this technique, the management needs to identify the total costs
of by considering both fixed and variable costs (Fagundes et al., 2017).
Marginal costing – This is another costing technique, under which the total costs of the
company is calculated by considering only the variable costs of the business. This is also one
of the traditional costing techniques under management accounting (Arora and Soral, 2017).
The application of these two costing techniques is shown below
In the given scenario, it can be identified that the company Areal Ltd. produces a product that
includes the following costs:
Direct materials - £200,000
Direct labour - £300,000
Fixed overheads - £300,000
Total production costs - £800,000
Sales in May - 100,000
Sales in June - 75,000
Sales per unit - £10
As per the above costs, the following are the income statements of the company -
(i) Absorption Costing
Particulars May June
Amount Amount Amount Amount
Sales £ 1000000 £ 750000
Less: Cost of sales
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Opening inventory 0 0
Cost of production
Direct material £ 200000 £ 200000
Direct labour £ 300000 £ 300000
Fixed overheads £ 300000 £ 800000 £ 300000 £ 800000
Less - Closing inventories 0 £ 200000
Cost of sales £ 800000 £ 600000
Profit (Absorption costing) £ 200000 £ 150000
(ii) Marginal Costing
Particulars May June
Amount Amount Amount Amount
Sales
Less - Cost of sales £ 1000000 £ 750000
Opening inventory 0 0
Cost of production
Direct material £ 200000 £ 200000
Direct labour £ 300000 £ 500000 £ 300000 £ 500000
Less - Closing
inventories
0 £ 125000
Marginal cost of sales £ 500000 £ 375000
Contribution £ 500000 £ 375000
Less - Fixed costs £ 300000 £ 300000
Profit (Marginal
costing)
£ 200000 £ 75000
Therefore, if the above two tables are considered, it can be stated that it will be better if the
company selects the absorption costing technique. It is because under the absorption costing
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technique, the income level of the company will be higher, which will help to improve the
financial position of the business.
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Task 3
Compare and contrast three planning tools used in management accounting, indicating
how effective you judge each to be and why. Your judgements should be supported by
evidence
The system of management accounting involves several planning tools. These planning tools
are very effective in the context of developing efficient and accurate plans for the business.
Some of the key management accounting planning tools are discussed below:
Responsibility budgeting – This is one of the planning tools under the management
accounting system. This tool is considered to be very effective in the context of improving
performance standards of the managers. The responsibility budgeting tool analyzes the
performance standards of the managers critically by considering their responsibilities at the
workplace. In most of the large multinational organization this planning tool is used (Shin
and Yun, 2017). For example, at Tesco Plc, the higher management has implemented this
planning tool in order to analyze the performance level of the managers in a better way.
There are several benefits as well as some limitations that are associated with this particular
planning tool and these are discussed below:
Benefits:
 The primary benefit of this planning tool is that the tool helps in improving
performance standards of the managers, which ultimately positively influences the
overall performance standard of the business (Deering and Lang, 2017).
 The responsibility budgeting is also very effective in making the managers more
responsible towards their role in the organization. They learn to make more effective
strategies for the business.
Limitations:
 The major limitation of this tool is that it is very critical to understand. This tool
involves several calculations and critical analysis, which cannot be done without clear
knowledge over the specific subject (Lees, 2017).
 This tool sometimes de-motivates the managers by identifying the loopholes in their
performance repeatedly.
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Standard costing – This is considered to be another effective planning tool under the system
of management accounting. This system works every efficiently in every organization, no-
matter it is large or small. While using this particular tool, the managers need to set some
standards for every activity of the business and at the end of the accounting period these
standards are used to identify the gaps in the actual performance of the company in terms of
those activities (Fagundes et al., 2017). Mainly, in the manufacturing organizations this tool
is used. For example, in Toyota Motors, this management accounting planning tool is
developed for better cost planning of the business. The advantages and disadvantages
associated with this system are discussed below:
Advantages:
 Standard costing tool is very effective in identifying the loopholes in the business
performance, which on the other hand helps the mangers developing better strategies
for the business.
 Standard costing system is very efficient in improving the level of efficiency of the
employees in the context of using organization’s resources. It means indirectly
standard costing helps in reducing the cost level of the business (Arora and Soral,
2017).
Disadvantages:
 Standard costing tool involves lengthy procedure. The process starts in the beginning
of the year and completed at the end of the year. Due to this sometimes decisions
making becomes delayed (Fagundes et al., 2017).
 Standard costing system cannot indicate the reasons behind the loopholes in the
organizational performance, which is a major limitation of the tool.
Net Present Value or NPV – This tool is considered as the capital budgeting planning tool
under the system of management accounting. Under this particular planning tool, the capital
investment decisions are taken. This particular capital budgeting or capital investment tool of
management accounting develops the plan for capital investment after analyzing the present
value of future cash flows that the investment project will generate in the future years (Chao
et al., 2017). Most of the organizations analyze the capital investment projects using this
particular capital budgeting planning tool under management accounting. For example, Tesco
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makes investment decision by considering this particular planning tool. The benefits and
limitations of this tool are discussed below:
Benefits:
 The key benefit of this tool is that the tool considers the profit factor associated with
the investment option. This makes the investment decision more effective. At the
same time, it can also be stated that this system or tool helps to develop logical plans
or decisions regarding capital investment (Zore et al., 2018).
 The net present value tool considers the time value of money. Considering the time
value of money is very important for making future capital investment decision
because it makes the decision appropriate in the present context.
Limitations:
 The major limitation associated with this particular capital budgeting planning tool of
management accounting is that the tool involves critical calculations, which require
specialized knowledge. The results from calculations under this particular tool are
understandable to the specialized personnel only (Hopkinson, 2017).
 Another limitation of this planning tool is the long time that is required for making
decision using this tool. It makes the decision-making process delayed.
Therefore, from the overall analysis, it can be stated that there are several effective
management accounting planning tools that are usable in the current business contexts. Most
of the large organizations are focusing on developing their business plans using these tools
because these tools help the managers making the right decision within the required time.
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Conclusion
The study has indicated some positive as well as some negative points associated with
management accounting and management accounting systems. As per the findings in this
study, the management accounting systems are closely associated or integrated with the
activities of the business. The study has mentioned that management accounting is very
effective in developing efficient and accurate business plans and at the same time, it is also
helpful in developing control measures. The management accounting systems help the
managers controlling cost and waste levels of the business. At the same time, the system also
helps in better inventory management. On the other hand, the study has identified that the
functions of management accounting are quite beneficial for the daily operations in the
organization. The study has shown the application of absorption costing and marginal costing
systems. Moreover, the study has indicated about some planning tools that are very useful for
making several organizational decisions and these planning tools are – responsibility
budgeting, standard costing and net present value method.
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