Management Accounting: A Comprehensive Guide to Cost Analysis, Budgeting, and Financial Problem Solving

This comprehensive report delves into the intricacies of management accounting, exploring its essential requirements, benefits, and applications within an organizational context. It examines various cost analysis techniques, including marginal and absorption costing, and demonstrates their application in preparing income statements. The report also investigates different planning tools used for budgetary control, highlighting their advantages and disadvantages. Furthermore, it analyzes how organizations adapt management accounting systems to respond to financial problems and achieve sustainable success. By providing a detailed evaluation of planning tools and their effectiveness in solving financial challenges, this report offers valuable insights for managers and students seeking to enhance their understanding of management accounting principles and practices.

Management Accounting
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Table of Contents
Introduction..................................................................................................................................3
Task 1.............................................................................................................................................4
P1................................................................................................................................................4
M1................................................................................................................................................8
P2................................................................................................................................................9
D1..............................................................................................................................................10
Task 2...........................................................................................................................................11
P3..............................................................................................................................................11
M2..............................................................................................................................................13
D2..............................................................................................................................................16
P4..............................................................................................................................................17
M3..............................................................................................................................................19
P5..............................................................................................................................................20
M4..............................................................................................................................................22
D3..............................................................................................................................................23
Conclusion..................................................................................................................................24
References..................................................................................................................................25
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3

Introduction
Being the management accountant in a business, the report includes the different
management accounting system of the business and their essential requirements. It
includes the benefits of the different management accounting system and its
application. Different management accounting tools will be explained such as marginal
and absorption which helps in determining the cost of the business. Different planning
tools which are used in the management accounting will also explain and how it
integrates with the business activities. The report also states the advantages and
disadvantages of the different budgetary control system and different planning tools
which helps in preparing the forecasting budget. In this report, the different
management accounting tools are adapted to respond to the financial problem of the
business.
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Task 1
P1. Explanation the management accounting and the essential requirements of
management accounting system.
Management accounting is a framework of management practices which are applied
within an organization to ensure the support to the top level managers in their work so
that they can take gainful decisions which will generate advantage for the business and
investors. Management accounting has wide meant and application of management
system not only improves the quality of budgeting but also enhances the overall
performance of the business.
Role of management accounting:
Management accounting is very important for the businesses and behaves like an
intelligent support for the managers. It improves the complete process of management
from planning to monitor and aids to gain profitable future (Butterfield, 2016).
Management accounting is enough diverse from a system of financial accounting and
some basic variances are as follows:
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Management
Accounting
It is related with managerial reports.
There is no requirement for publishing the
management reports
No special format
Financial Accounting
It is related with the preparation of financial
statements.
Financial statements should be published.
Financial statements are made according to
the legal denoted format.

(Image 1: Difference in financial and management accounting)
(By Author, 2018)
Management accounting includes following activities:
• Planning: planning for the future activities to improve the quality of working.
• Controlling: management practices are applied to establish effective control of the
business process.
• Review: Review of applied strategy to improve the results.
Application of management system is necessary for a modern environment to maintain
quality in business activities because it is necessary to stay in the market. Following are
some management applications with requirements that can be applied in a business:
Inventory management system:
Inventory includes raw material, WIP stock and finished goods items which are held for
the sale purpose. Inventory management is one of the most activities of management
because it affects the organizational revenue (Viktorovna and Ivanovich, 2016). The
system of Inventory management could be well-defined as a combination of some
hardware, software and accounting practices which jointly makes a system to improve
the control of inventory flow. Following method is available for inventory management:
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Just-In-Time Economic
Order Quantity
ABC Inventory
Analysis
FIFO Weighted
Average

(Image 1: Different Inventory control Frameworks)
(By Author, 2018)
Some requirements of this system are as follows;
• Bodily security and timely review of inventory warehouses.
• Right and timely recording of inventory purchase and sales transactions (Viktorovna
and Ivanovich, 2016).
• Proper use of control methods to control the ordering and purchasing costs.
• Appropriate recording and treatment of abnormal losses.
Cost management system:
As most applied the system to manage the costs, cost management system can be
defined as an application which supports the managers in cost controlling activities to
maintain the product cost at a reasonable level (Savić, et. al., 2014). Cost management
is related to the complete recording and classification of cost related data to maintain it
at a reasonable level. Costs are classified as follows:
Direct cost: it is that cost that is connected to the consumption of direct labour, material
and overheads.
Indirect cost; a cost that is not directly related with the product but occur to produce the
product.
Fixed cost: a cost which is charged on a fixed period like rent income (Donizetti, 2016).
Variable cost: a cost which occurs according to the production volume like mat6irial
cost.
Some requirements of the system:
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• Cost accounting system requires correct classification and recording of different costs
to ascertain the right cost of the product.
• If a company is engaged in the production of the product in batches separate
recording of costs as per batches.
Price optimization system:
POS is a tool of management which is used to be applied with an organization to study
the customer reaction for the prices so that management can understand the
purchasing acceptance of the product and set a reasonable price level (Yuan, et. al.,
2014). Price optimization system is applied to find a level of the price at which, sales
and revenue will be maximum.
Some requirements of this system;
• Historical data on sales and prices.
• If an organization prepares fact reports management can use those reports also.
• The report which shows product acceptance and popularity of the product.
• Trend analysis report.
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M1. Evaluate the benefits of management accounting systems and their
application within an organisational context
Applications of Management accounting is very useful for the businesses because it
works as an intelligent supporter for business activities from the stage of planning to
monitor. List of a management system for a business is very long and some of them are
as follows;
The superiority of planning: Super planning is must be stable in the current market
because every business is facing heavy competition and a good planning for a future
business activity helps to reduce the expenses and improve profits (Matambele, 2014).
By doing this, an organization can improve the flexibility of activities which will provide a
competitive advantage.
Review of staff performance: performance review is another benefit of the
management system. Performance reports which are made under management
reporting give complete and accurate information about the performance of each
department. Departmental performance report shows the individual efficiency of staff.
By using these tools, company management can evaluate the performance of staff and
take corrective action.
Departmental Communication and coordination: Flow of information and
coordination is necessary between different departments because it aids the
department managers to understand the current requirement of entity, for example, if a
company facing trouble in achieving the sales targets, production department should
understand the reasons because it is possible that the same problems are arising due
to quality issues (Matambele, 2014).
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P2. Explain different methods used for management accounting reporting
Management reporting is another great tool of management accounting which supports
the managers in strategic planning. For this purpose, it affords them useful info so that
they can take correct and sure decisions:
Demand reports: Demand report shows the estimated demand of product which is
calculated on the basis of historical demand and sales data, to maintain a reasonable
level of finished goods so that business can maintain sufficient supply of product in the
market (Sullivan, 2018). Demand reports are very important part of the business
because it has an effect on various management activities like purchasing of raw items,
product level, and supply.
Performance report: performance report can be made at the department level or
management level to monitor the efficiency level of staff. As high performance
generates extra benefits for the company, performance report is a most useful tool of
management reporting. At the department level, it shows the efficiency of individual
department and at the company level, it shows the overall efficiency of the company. By
using this report, company management can evaluate the performance of staff and take
actions to improve the deficiencies.
Budget reports: Budgeting is a great tool of management which is used to make a
roadmap of future activities according to the fund requirements. There is various type of
bouget reports can be made by the managers according to their need for information
(Sullivan, 2018). A master budget of the company includes complete information about
the expected incomes and outflows which is made on the basis of past year data and
sufficient estimations.
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D1. Provide a critical evaluation of how management accounting systems and
management accounting reporting are integrated within organisational processes
The management accounting report and systems are integrated with each other in a
way that they both compliment in facilitating the decision making process. The
management accounting systems are used to determine properly record the data and
transactions that are being carried out during the particular period. The reporting of the
same is very much necessary so that there can be a critical analysis of the transactions
that are being recorded by the presentation of the same in a format which is
understandable and easy to analyse. Management accounting reporting present the
data recorded in an effective way so that the effective decisions can be taken by the
management.
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Task 2
P3. Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costing
Calculation of Costs
Marginal Costing
Particulars
Amount
(£)
Direct Costs:
Direct Material 5
Direct Labour 3
Variable Manufacturing
overhead 2
Total Cost per unit 10
TSR Pvt. Ltd.
Income Statement
Marginal Costing
Particulars
Amount
(£)
Amount
(£)
Sales Revenue (25*10000) 250000
Cost of Sales
Opening Inventory 0
Add: Cost of Production (10*10000) 100000
Less: Closing Inventory 0 100000
150000
Less: Variable distribution and
distribution costs:
Administration 30000 30000
Contribution 120000
Less: Fixed Costs
Fixed manufacturing overhead 40000
Fixed selling and administrative expenses 30000 70000
Net Profit 50000
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Calculation of Costs
Absorption Costing
Particulars
Amount
(£)
Direct Costs:
Direct Material 5
Direct Labour 3
Variable Manufacturing
overhead 2
Fixed Manufacturing
Overhead 4
Total Cost per unit 14
TSR Pvt. Ltd.
Income Statement
Absorption Costing
Particulars
Amount
(£)
Amount
(£)
Sales Revenue (25*10000) 250000
Cost of Sales:
Opening Inventory 0
Add: Cost of Production (14*10000) 140000
Less: Closing Inventory 0 140000
Gross Profit at Normal 110000
Less: Distribution and Administration
Costs:
Variable Administration and selling cost 30000
Fixed selling and administrative
expenses 30000 60000
Net Profit 50000
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M2. Produce appropriate financial reporting document that shows a profit under
absorption and marginal costing if only 5000 units of radiators are sold
TSR Pvt. Ltd.
Income Statement
Marginal Costing
Particulars
Amount
(£)
Amount
(£)
Sales Revenue (25*5000) 125000
Cost of Sales
Opening Inventory 0
Add: Cost of Production (10*10000) 100000
Less: Closing Inventory (10*5000) 50000 50000
75000
Less: Variable distribution and distribution
costs:
Administration 30000 30000
Contribution 45000
Less: Fixed Costs
Fixed manufacturing overhead 40000
Fixed selling and administrative expenses 30000 70000
Net Profit -25000
TSR Pvt. Ltd.
Income Statement
Absorption Costing
Particulars
Amount
(£)
Amount
(£)
Sales Revenue (25*10000) 125000
Cost of Sales:
Opening Inventory 0
Add: Cost of Production (14*10000) 140000
Less: Closing Inventory (14*5000) 70000 70000
Gross Profit at Normal 55000
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Less: Distribution and Administration
Costs:
Variable Administration and selling cost 30000
Fixed selling and administrative expenses 30000 60000
Net Profit -5000
Reconcilliation accounts
Particulars Amount (£)
Loss from Absorption costing -25000
Loss in Closing stock (5000*4) 20000
Loss from Marginal costing -5000
Produce financial reporting documents showing labor and material variances
respectively
Direct Labor rate variance = (Actual Hours x Actual Rate) – (Actual Hours x Standard
rate)
= Actual Cost – (3400 x 5)
= 17680 – 17000
=£680
Direct Labor Efficiency Variance = (Actual Hours x Standard Rate) – (Standard Hours x
Standard rate)
= Standard cost of Actual Hours – Standard cost
= (3400 x 5) – 15000
= 17000 – 15000
=£2000
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Material Cost Variance = Actual Cost – Standard Cost
= 20900 – 11000
= £9900
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D2. Accurately apply and interpret data for a range of business activities in TSR
Pvt. Ltd
It could be analysed that the profit of TSR Pvt Ltd remained in both the costing
techniques when there was no closing stock. There was the difference in the profit as
soon as there was a change in the sold unit from 10000 to 5000 units of radiators and
there was closing stock. The profit in absorption costing technique was much more in
comparison to the marginal costing technique. The profit from the marginal costing
technique was of £100000 whereas in absorption costing technique it was £120000.
The difference was because in marginal costing technique there was the treatment of
overhead cost as well as fixed cost as period cost and was charged in same period
whereas in absorption costing technique it is charged over the number of units
produced thus making a difference due to closing stock. It could also be identified in the
long run the profit from both the technique is same.
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P4. Advantages and disadvantages of different types of planning tools used for
budgetary control
Budgetary control is essential for the organisation as it provides the planning to achieve
the objectives. Budgets are the plan for the future in which figures are expected of the
revenues and expenses of the organisation. It is the process in which financial
statements are prepared and the management considers both the activities of the
organisation, internal and external (Klychova, et. al., 2014).
Advantages of the budgetary control:
1 The budgetary control helps in adapting the new changes which are prevailing in the
market. As the market is frequently changing and going forward budget helps in keeping
the business on the track to succeed.
2 Budget coordinates the different activities of the department. A budget helps in
translating the different strategies and plans into action.
3 Budgets also improve the allocation of resources properly and it provides a tool for the
corrective action.
4 Budget increases the efficiency of the business by controlling the cost and eliminating
the wastage of the company (Klychova, et. al., 2014).
5 It also aims at maximising the profit of the business by coordinating the different
functions and control the over cost and reduces the expenditure.
6 The budget also finds out the deviation from the predetermined standard and correct
those actions promptly which helps in increasing the overall performance of the
business.
Disadvantages of the budgetary control:
1 Budget is relying on the numeric data and it is possible the information which is used
may not be determined while preparing the budget that may affect the decision making.
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2 The budgetary control system involves higher cost. To analyse the budget and comply
with the data requires a huge cost. When new financial reports are prepared and new
employees are hired the cost rises of the business.
3 Budgets are the estimation for the future they don’t provide accurate or exact
information, so they can cause the perception of unfairness and misleads the business
(Marble, et. al., 2016).
4 When the budget structure is rigid, it reduces the initiative and innovations and also
makes impossible to attain the money for the new jobs.
5 The budget should be revised from time to time otherwise it leads to more
administrative expenses and employees also lose their faith.
6 To prepare the budget it requires a specialised staff, and if it is implemented badly in
the company it will affect the employees and the organisation (Marble, et. al., 2016).
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M3. Different planning tools and their application for preparing and forecasting
budgets
Three different planning tools which help in preparing and forecasting budgets are:
1 Financial budget: This budget contains the information related to the assets,
liabilities, revenues, and expenses of the company. Balance sheet and income
statement are the two important tools which give the financial information of the
company by stating the assets and equities of the company. By preparing this budget
the company can find out the strength, weakness, and opportunities. It helps in
preparing the tax returns and forecast the loan applications.
2 Master budgets: the Master budget is used in the large companies; it is an aggregate
of the individual budgets. It combines the factors such as operating expenses, sales,
and assets to establish the goals of the organisation and also evaluate the performance
of the business. It helps in identifying the problem of the company and then planning
ahead of the different department. In the master budget, all the functional budgets are
stated in one report. It gives the meaningful information to the top management (Marble,
et. al., 2016).
3 Cash flow budget: Cash flow budget tells the company whether they have ample
cash to meet out the certain requirements or not. This budget includes the factors such
as accounts payable and accounts receivable. It operates whether the cash is used
productively or not manages the cash wisely. The main goal of this budget is to making
a profit, expanding the capacity of production, purchasing raw material at a discount,
etc.
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P5. Compare how organisations are adapting management accounting systems
to respond to financial problems
Organisations are adopting different management accounting techniques to solve the
financial problem and to control the operations and finances of the company. Different
companies adopt different management accounting tools which give the proper solution.
The organisation faces many financial problems in the company such as cash flow
problems, funding, economic cycle. Too much debt in the business is also a major
problem. Poor financial management, not enough cash which can meet the expenses
are the major problem. Legal challenges such as suits are correct or not are the
problems which have been faced by the company. There are internal and external
factors in the business which also cause the financial problem such as money, politics,
customers, and suppliers (Crane and Matten, 2016).
Management accounting helps in creating some plans which solve the problems related
to finance. The manager needs to create the budget which guides where the money
should be spent and allocate the resources accordingly. Management accounting helps
in achieving the goals and set the plan to attain the objectives of the company. The
company needs to prevent the future challenges by the prior plan of the financial
problems. Some companies maintain the financial statement which includes the income
statement, balance sheet and cash flows of the company. It shows the exact financial
position of the company so that we can determine the cost of the particular factors.
Some companies adopt marginal and absorption costing to reduce the cost of
overheads. Management accounting not only gives the information but also plan and
control the financial data. With the help of accounting tools, decisions are taken easily in
the business and it helps in the overall growth and performance of the company.
Management accounting measures the relating to the value of money so that the
manager can compare it with the different organisation. Some companies used cost
accounting which provides source data for preparing the statement and measuring the
inventory cost. Management accounting helps in reducing the expenses of the company
and increasing the revenues by generating more profit (Kerzner, 2017).
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M4. Analyse how, in responding to financial problems, management accounting
can lead organisations to sustainable success
Management accounting system helps in taking the decisions and improves the
business performance which leads the organisation to the sustainable success. By
combining the business activities with the financial expertise the business achieve the
sustainable success. For the long-term success, the Board and senior management are
responsible as they are managing the functioning of the business. The managers help
them in identifying the opportunities which generate the value for the stakeholders and
manages the cost and risk of the company. Management accounting describes the
fundamental values, norms, qualities, and features which help in analysing the
individual behavior (Crane and Matten, 2016).
Sustainable information helps in taking the strategic decision making and uses it in
management risk decisions. Management is accounting tools and techniques helps in
sustainability matters into the decision making such as lifecycle costing, carbon
footprinting, etc. For the sustainable success, it is important to serve the public interest
and focus on the issues of the accounting of sustainable development. It solves the
financial problem of the company by emerging the jurisdictional requirement and
analysing the cash requirement of the company (Goffee and Scase, 2015).
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D3. Evaluate how planning tools for accounting respond appropriately to solving
financial problems to lead organisations to sustainable success
Planning tools helps in analysing the financial problem and determines the difficulty that
is arising in the business. By creating the budget and forecasting the future plan the
problem related to cash can be solved. The budget gives the information on the cash
inflow and outflow. For the sustainable success, the manager needs to find out the
present needs and the future needs. Management accounting helps in measuring the
performance and decision making which leads to the success of the organisation
(Weygandt, et. al., 2015). Different organisations adopt different techniques and follow
policies and procedures to deals with the financial problem. Planning tools determine
the cost of the different activities and reduce the unwanted cost of the company.
Different planning tools analyse whether the cost is occurring more and how to reduce
that cost by overcoming the weakness.
The financial problem related to debt, cash inefficiency, loans, etc. is solved by
maintaining the planning and management accounting tools efficiently and effectively in
the organisation. Planning tools reduces the expenses and over cost and increases the
profit of the company which helps in solving the financial problem. Planning tools help in
the sustainable growth of the company and the management accounting gives the
monetary information which helps in organising and controlling the finance properly
(Weygandt, et. al., 2015).
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Conclusion
The report has explained the different management accounting tools and how this tool
helps in managing the business properly. The report also states about the costing
techniques which is essential for any business to determine the cost. Management
accounting gives the information about the financial data of the company which helps in
the development and improving the performance of the business. Management
accounting helps in formulating the decisions of the company and attaining the goals of
the organisation. In this report, different management accounting tools are used to
respond to the financial problems which lead to the sustainable success of the
organisation. In this report the use of different planning tools is explained and how these
tools work effectively in the organisation. Different management techniques which
analyse the cost are explained. The financial report is produced that interrupt the range
of data of business activities. The report overall explains the different management
accounting tools, planning tools, and techniques which reduces the financial problem.
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