Management Accounting: A Comprehensive Analysis of Systems and Applications

This report delves into the intricacies of management accounting, exploring its essential components, benefits, and applications within an organizational context. Using the Hakim Group, a UK-based optical company, as a case study, the report examines the role of management accounting in planning, cost control, and decision-making. It critically evaluates the integration of management accounting systems and reporting within organizational processes, highlighting the importance of coordination and communication. The report also analyzes various tools and techniques used in management accounting, including variance analysis, capital budgeting, and inventory analysis. Furthermore, it explores how management accounting can be leveraged to address financial problems and drive sustainable success for organizations.

Assignment – Management Accounting
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Table of Contents
Introduction.................................................................................................................................................3
Task 1..........................................................................................................................................................4
[M1] Evaluate the benefits of management accounting systems and their application within an
organizational context for the chosen scenario........................................................................................8
[D1] Critically evaluate how management accounting systems and management accounting reporting is
integrated within organisational processes............................................................................................10
Task 2........................................................................................................................................................11
[M2, D2] Demonstrate an understanding of management accounting systems..........................................11
Reconciliation statement is prepared to reconcile the net income of both the statements. Net income of
marginal cost is reconciled it with that of the absorption cost. This can be done by the two ways-......14
Difference between Marginal Costing and Absorption Costing............................................................14
Task 3........................................................................................................................................................16
LO3 Tools of Planning along with the Advantages and Disadvantages.....................................................16
[M3] Analysis of the use of the tools of the planning.......................................................................19
Task 4........................................................................................................................................................22
LO4 Compare ways in which organization could use management accounting to respond to financial
problems....................................................................................................................................................22
[M4] Analyse how, in responding to financial problems, management accounting can lead
organizations to sustainable success......................................................................................................24
Conclusion.................................................................................................................................................25
Bibliography..............................................................................................................................................26
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Introduction
The report covers the aspects relating to management accounting. All the possible aspects
relating to management accounting has been covered in the report. The report has been divided
into four parts. Each part deals with the individual part of management accounting system. A
combined reading of all the four sub-points will help to give a clear understanding of the concept
of management accounting reporting. For the ease of understanding of the ambit and scope of
management accounting, a practical instance of UK based company namely; Hakim Group has
been taken for the reference purpose. Hakim Group is the top SME Company established in the
year 2001 particularly engaged in the optical business. This will facilitate the reader of the report
to understand in an interpretative manner. The applicable and suitable conclusions have been
given at appropriate places. This will help to understand the role and significance of management
accounting system.
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Task 1
Introduction
The given report deals with the concept of management accounting in deals. This will help to
understand the scope and ambit of management accounting in detail. The report has been
covered in two parts. The first part deals with the essential requirements of management
accounting system. The latter part deals with the different possible methods that can be used for
management accounting reporting.
Content
Management accounting is concerned with the managerial accounting and other aspects of
management. All these branches of studies help to achieve organizational goals and objectives.
As such, every business organization whether manufacturing concern or service-oriented needs
to formulate and implement management accounting in their organizational structure. Sometimes
management accounting and management accounting system are used interchangeably
(Omotayo, 2015). However, there is a conceptual difference between both the concepts. For the
better result, all the departments operating or functioning in the concerned business enterprise
needs to work in coordination and with mutual assistance. This can be done by the preparation of
various budgets by all the concerned departments. This will help to establish pre-determined cost
and revenue standards for every department. Achievement of their respective objectives will
ultimately help to fulfill overall organizational goals (Sukhia, et. al., 2014).
Hakim group is the UK’s best small company as per the Sunday Times List for 2018. The
company is continuously attempting to diversify its business operations. As such, the
management accounting will help to diversify its business operations and activities.
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Image 1: Essential requirements of management accounting systems
Source: By Author, 2018
The above essential and prominent requirements of management accounting have been explained
in detail. These requirements need to be present if the organization wants to formulate and
implement management accounting system in their organization.
1. Planning: For management accounting to be successful, proper planning needs to be done. This
planning will provide a strategic direction to all the personnel working at all the levels of the
Hakim group (Sukhia, et. al., 2014). All the possible circumstances should be considered during
the planning stage. The assumptions should be listed to the extent possible. Also, the possibility
of these assumptions should be mentioned. This will give the planning report a better approach
and reflect an achievable stage. For making planning an effective step, all the concerned
departments or segments of Hakim Group should be involved in the planning.
2. Management accounting reporting: The useful information generated from the management
accounting system is formulated under the management accounting reporting. For information to
be presentable, it is essential that information should be presented in an informative way. There
are many ways to present information in an understandable manner. The major tools used to
present information are charts, tables, graph and bar charts. This will help the reader to interpret
the information accurately and correctly (Omotayo, 2015).
3. Better coordination: The management accounting will provide fruitful result only if there is
proper coordination and management between all the departments and segments of the Hakim
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Planning
Management accounting reporting
Better coordination
Correct decisions

group. Only then the organization will be able to achieve the results and outcomes of the
management accounting systems (Guga & Musa, 2015). Such coordination can be maintained if
all the departments maintain a healthy environment in the concerned organization. Besides,
within the department, there should be a trustworthy relationship between all the employees and
personnel working at all the levels.
4. Correct decision: The management accounting should provide the correct and accurate result
and output keeping the assumptions in consideration. The incorrect or misleading result may
facilitate the top level management to take wrong decisions (Anna, 2015). Taking wrong
decision may bring closure to the business of the Hakim group. This is the reason that the
branches of management accounting need to be carefully applied by any organization. All the
possible consequences should be considered before going to any branch of management
accounting (Ada & Ghaffarzadeh, 2015).
The different methods that can be used for management accounting reporting are as follow:
Image 2: Different methods used for management accounting reporting
Source: By Author, 2018
Budget reporting: Under budget reporting, different types of budgets are prepared. Budgets are
prepared by different departments or segments of the concerned business enterprise. These
budgets determine or fix the standards or benchmarks for relevant cost or revenue. Personnel or
employees of all the departments must work to achieve the departmental objectives. This will
help to achieve organizational goals and objectives. This can be possible only if all the
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Budget
reporting
Variance
analysis
Capital
Budgeting

employees work in coordination with one another. Generally, the budgets are prepared on the
basis of different assumptions.
Variance analysis: Under variance analysis, the difference between budgeted expenditure and
the actual expenditure is determined (Guga & Musa, 2015). This will help to identify the
difference between the two costs. Identifying reason for such difference is crucial for strategic
decision making. This will help to amend or modify the budget relating to the next or
forthcoming period. The difference can be arises due to controllable or uncontrollable reasons.
Another classification for such difference can be normal or abnormal reasons (Anna, 2015).
Capital budgeting: Under capital budgeting, tools and techniques of capital budgeting are used
for considering various capital projects. There are many aspects involved in a capital budgeting
related project. Some of the prominent and widely used aspects and decision criteria involved in
capital budgeting are useful life, cash flows associated and cash outlay required. Selecting
appropriate capital project is very crucial and an important decision (Ada & Ghaffarzadeh,
2015).
Conclusion
From the discussion throughout the report, it can be concluded that the management accounting
is essential for every organization. This importance has been explained by explaining the
situation of Hakim group, a UK based company dealing in optical business. Accordingly,
methods that can be employed or used for management accounting reporting has been listed.
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[M1] Evaluate the benefits of management accounting systems and their application within
an organizational context for the chosen scenario.
The benefits of management accounting will help the business organization to achieve their
desired goals and objectives. For the better result, the top level or strategic level management
should consider the implications and consequences and the benefits that it will achieve on the
implementation of management accounting information system in the organizational
environment.
Some of the major and prominent advantages of the management accounting system are
explained below:
Image 3: Advantages and benefits of management accounting systems
Source: By Author, 2018
1. Helps in cost reduction: The management accounting system helps to reduce or eliminate the
cost to the extent possible. Such reduction is possible only if the management identifies the
loopholes in the cost structure of the various products and services dealt by the Hakim group.
2. Assist in boosting sales revenue: The management accounting system helps to increase the
sales of the business organization from all the possible sources. It is imperative to note that the
sales can be generated or raised from direct and indirect sources. As such Hakim group should
aim to earn sales from both the sources.
3. Helps in achieving departmental objectives: The individual departmental objectives, both
short-term, and long-term can be achieved and that too within the specified time span. This will
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Helps in cost
reduction
Increasing sales
revenue
Helps in achieving
departmental
objectives

create confidence in the mind of all the personnel working in the different levels. This evaluation
should be done without the personal bias of responsible officer. Placing such control will force
the employees to work towards the maximum efficiency. Also, this will create fear in the mind of
employees working at all the levels.
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[D1] Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes.
The management accounting system can be integrated with the organizational processes. Such
integration will help the Hakim group to expand its business operations and sustain in the
business environment and the concerned and respective industry.
This integration is impulsive and imperative for every business organisation. Ignorance of this
integration will bring closure to the business operations.
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Task 2
[M2, D2] Demonstrate an understanding of management accounting systems.
Marginal costing is the basic technique used in decision making. It is the sum total of direct labor
cost, direct material cost and direct expense cost. Under marginal costing the fixed cost is
excluded which means that the differences occur due to the variable cost involved in the
production. The difference between the variable cost and the revenue earned is termed as
contribution. The concept of marginal costing is important for proper allocation of resources so
as to increase the marginal revenue over marginal cost. The selling price in the marginal costing
is evaluated by adding the contribution. Most widely used techniques in the analysis are break
even analysis and cost volume profit analysis. The basic disadvantage of calculating the marginal
costing is that the company cannot take all the strategic decisions dependent on the contribution
itself.
Absorption cost includes all the cost used during the manufacturing of a product in production
units. Manufacturing cost in production units includes direct material, direct labor as well as
fixed and variable manufacturing overheads. Therefore, absorption costing is also known as full
costing or full absorption costing. Absorption cost is used for external reporting; so it is
frequently used by the managers for decision making. It also charges the direct cost involved in
the production as well the indirect cost. Indirect cost is calculated by dividing the total cost
overhead to the budgeted total volume. The most important advantage is that it involves fixed
cost in the production due to which various companies uses this method to prepare their financial
accounts. The problem in the absorption cost technique arises when there is change in cost per
unit with the change in level of output. The unit cost of production is affected by the difference
between the opening stock and the closing stock.
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Income Statement of Marginal Costing
Particulars £ £
Sales 17500
Marginal Cost of Sales:
Opening inventory 0
Add: Cost of Production 7800
Less: Closing Stock 1300 6500
11000
Less: Variable distribution and
administration cost
500
Contribution 10500
Less: Fixed Cost 1800
Less: Selling and administration cost 1200
Profit of the year 7500
Marginal costing statement is prepared by the companies for strategic decision making. Under
marginal costing the inventory is evaluated at variable costs including inventory of finished
goods as well as of the work in progress. According to the above analysis it can be seen that only
variable costs are included while analysing the financial statements. This results in the profit of
the year of £ 7500. Here contribution per unit reveals that how profit and volume are related.
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This shows that at this point the concept of over and under absorption does not exists due to the
absence of fixed cost.
Absorption cost analysis includes evaluation of variable costs with the fixed costs. On contrary
with marginal cost, absorption cost values finished goods inventory and the work in progress
both at variable costs and fixed costs. Above analysis shows both the cost involved in the
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Income Statement of Absorption Costing
Particulars £ £
Sales 17500
Cost of Sales:
Opening Inventory 0
Add: Production Cost (16*600) 9600
Less: Closing Inventory 1600
Gross Profit at normal 9500
Less: Variable Marketing and
Administration
500
Gross Profit at actual 9000
Less: Distribution and administrative
Cost
1200
Net Profit/Loss 7800

production along with the closing inventory. As a result profit earned by the organization
amounted to be £ 7800 with the inclusion of the fixed costs.
Reconciliation statement is prepared to reconcile the net income of both the statements. Net
income of marginal cost is reconciled it with that of the absorption cost. This can be done by the
two ways-
A) Reducing the fixed manufacturing overheads from the closing inventory.
B) Adding the fixed manufacturing overheads in the opening inventory.
Therefore, in the reconciliation statement prepared above has followed the first aspect due to
absence of the opening stock. In order to reconcile the closing stock of the fixed assets has been
deducted from the profit of absorption cost. This resulted in the profit earned by the marginal
cost. The situation of the under absorption and the over absorption arises due to the differences
in the actual and the budgeted value. Hence the comparison of the results of absorption cost and
the marginal cost is necessary for the valuation of over absorption and under absorption.
Difference between Marginal Costing and Absorption Costing
Point of Differentiation Absorption Costing Marginal Costing
Inventory Valuation Under absorption costing both
variable and fixed costs are
taken for valuation.
Under marginal costing only
variable cost is considered
while valuation.
Product Costing Both variable and fixed costs
are treated as product cost.
Only variable costs are treated
as product cost.
Profit Higher profits will be earned
if the unit of ending inventory
is high.
Higher profits will be earned
with the lower unit of
inventory.
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Over or Under Absorption There may be under or over
absorption of fixed cost under
this costing.
As in marginal costing no
fixed cost is involved so, there
is no under and over
absorption of fixed cost.
Reporting Purpose It is prepared for external
reporting.
Marginal costing is done for
the internal reporting.
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Task 3
LO3 Tools of Planning along with the Advantages and Disadvantages
The tools of planning which can be used for the planning and budgetary control are explained
below which has advantages and disadvantages attached to it:
1. Capital Budget- The planning tool for financing a decision which requires investment decision
and the benefits arising by analysing the risk and return can be identified (Borad, 2018).
Advantages:
 The best suitable project can be identified through which the risk will be less and the return will
be high.
 The risk of the company Hakim Group will be changed to opportunity and the expenses will be
incurred less.
Disadvantages:
 The uncertainty of the future can lead to the wrong decisions and the decisions which have been
taken for long-term will not be changed.
 The factors which are numerical or quantitative in nature are considered and other factors are
ignored.
2. Budgetary Control- The process of budgeting which helps in the interpretation and comparison
of the actual and budgeted results and the difference or the variance can be identified (Hartman,
2017).
Advantages:
 The different activities of the company Hakim Group can be controlled by the departments
separately.
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 The cost of the company Hakim Group can be controlled and it helps in bringing the efficiency
and economy.
Disadvantages:
 The conditions present are the inflationary conditions and it is difficult for the company to
prepare the budgets.
 The cost is relatively high and the small organizations can’t afford it like Hakim Group.
3. Variance Analysis- The process which helps the company Hakim Group in controlling and
reducing the cost. The favourable variance reflects the efficiency and hence the person
responsible can be appreciated.
Advantages:
 The inefficiency of the company Hakim Group can be reflected along with its extent.
 The reasons for the variance can be identified and the action which is required can be taken.
Disadvantages:
 The flexibility of the company Hakim Group is less.
 The profitability’s impact is considered which can present an inaccurate picture of the
performance of the company Hakim Group.
4. Inventory Analysis- The analysis through which the cost of the inventory can be allocated as
per the material, labour and overhead (Nikolakopulos, 2018).
Advantages:
 The inventory can be controlled in a proper way and the priority can be determined.
 The inventory can be allocated as per the cycle counts of the company Hakim Group in an
effective and efficient manner.
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Disadvantages:
 The conflict can arise with the other system since it does not meet the accepted principles.
 The inventory analysis requires more resources than the traditional system to maintain the
inventory.
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[M3] Analysis of the use of the tools of the planning
The identification of the future circumstances requires budget preparation and the analysis of the
budgets. There are various tools which can be used to prepare the budgets and forecasts. The
company Hakim Group can be developed with the help of strategic analysis and the ability. The
analysis can be done with the help of the following tools or the techniques:
1. PEST Analysis- The four factors that majorly affect the company Hakim Group in terms of
performance and activities for the future period. The macroeconomic environment can be
understood and the business can be assessed in an inclusive manner.
Image: PEST Analysis
Source: (Tsang, 2018)
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2. SWOT Analysis- The strategic tool which helps the company Hakim Group in identifying the
strengths, opportunities, threats and the weakness. The strengths will help the company in
overcoming the weakness and converting threats into opportunities.
Image: SWOT Analysis
Source: (Shewan, 2017)
3. Porter’s Five Forces Model- The model which helps the company Hakim Group in competing
the market effectively and efficiently. The encouragement to go beyond the competitors will be
provided and the effect of the same will be analysed. The competitive industry to the company
Hakim Group in terms of the attractiveness will be identified.
20

Image: Porter’s Five Forces
Source: (Ann, 2017)
4. Balanced Scorecard- The goals of the company to be converted into the objectives are targeted
and the analysis of the achievement of the targets is interpreted. The results of the past are given
importance and the future is ignored.
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Task 4
LO4 Compare ways in which organization could use management accounting to respond to
financial problems
There are different ways in which management accounting can be used to solve financial
problems. As such, through formulating or implementing different techniques or tools, financial
problems can be resolved effectively. These ways or methods can be used by the Hakim group
and similar organizations in the business environment.
Image 4: Ways to respond financial problems through management accounting
Source: By Author, 2018
1. Departmental profits: The departmental profits help to determine the progress and performance
of all the departments. This will help the top level of the concerned business enterprise to
evaluate the individual performance of all the departments. The inefficient department will come
to light and attempt is made to improve their performance.
2. Cost per unit: Determination of correct and accurate cost per unit for every products and service
dealt with by the Hakim group and other companies functioning in the optical sector or another
sector. Determining cost involves careful consideration regarding cost allocation and absorption.
The production manager should aim to correctly
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Departments profit
Cost per unit
Divisional growth
Setting the production target
Other methods or ways

3. Divisional growth: In every business organization, there are different divisions working towards
the accomplishment of overall goals and objectives. It is necessary to continuously monitor and
evaluate the performance of all the employees working in these divisions.
4. Setting the production target: The financial problem can be achieved by setting the production
target for the production department. This will inform the production department regarding the
no of units to be produced by them during a specified period or a time interval. This will
indirectly place a control on inventory management system.
5. Other ways or methods: There are other ways as well that can help to solve the financial
problems. The most widely used method that can be used is redressing the grievances of the
employees particularly the production department. Other ways that can be employed is
conducting a surprise audit by superiors on the activities and task performed by their
subordinates.
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[M4] Analyse how, in responding to financial problems, management accounting can lead
organizations to sustainable success.
By applying the aforesaid the methods and ways in the organizational structure of Hakim group,
it can achieve strategic advantage over its rival firms.
1. Higher profit per unit: Solving financial problems will help to achieve higher profit per unit.
This will ultimately lead to increase the overall profits.
2. Creates and capture market share: The implementation of ways or methods to solve financial
problems will help to capture market share in the market.
3. Builds goodwill: Solving financial problems will help to build and create goodwill in the
concerned industry.
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Conclusion
From the discussion throughout the report, it can be concluded that management accounting is
very crucial for every business organization. Besides, costing income statement or costing
statement of profit and loss as per two costing approaches, namely, absorption costing and
marginal costing has been prepared in the given report. Every manufacturing-oriented business
enterprise should prepare these income statements to identify where cost-cutting can be done.
This will also help to compare the costing profit with the rival firms or competitive business
organization. For the better understanding of the concept among the user, a table has been
inserted depicting the conceptual difference between the costing approaches.
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