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

This report delves into the fundamental concepts and applications of management accounting, exploring its role in organizational decision-making, cost analysis, and financial reporting. It examines various management accounting systems, including cost accounting, financial accounting, and budgetary control, highlighting their advantages and disadvantages. The report also provides practical examples and calculations to illustrate the application of key management accounting techniques, such as marginal costing, absorption costing, and variance analysis. By analyzing real-world scenarios, the report demonstrates how organizations can adapt management accounting systems to address financial problems and improve their overall performance.

Management Accounting
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Contents
Introduction:....................................................................................................................................3
P1. Explain management accounting and give the essential requirements of different types of
management accounting..............................................................................................................4
P2. Explain different methods used for management accounting reporting................................7
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing......................................................................10
P4. Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.......................................................................................................................14
P5: Compare how organizations are adapting management accounting systems to report
financial problems.....................................................................................................................19
Conclusion:....................................................................................................................................22
Bibliography..................................................................................................................................23
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Introduction:
The management accounting report which is prepared in this assignment relates to the various
concepts and systems associated with application of management accounting system in an
organisational context which is working in the current business environment. The report will
include the explanation to various type of management accounting systems and their role in
performing the various management functions in the organisation. The report will include
applying various techniques of management accounting and cost accounting and generating
appropriate financial reports for the company. The use of different planning tools of budgetary
control and their use in planning and finding the variances for the company will be analysed in
this report. Thus the overall report will help in understanding the overall process of management
accounting and its benefits in current business environment.
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P1. Explain management accounting and give the essential requirements of different types
of management accounting.
Management accounting can be defined as the operational function of the managers of the
company in order to perform smoothly their various functions regarding planning, organizing
and controlling. The information are presented and interpreted in this function in order to assist
management in decision making function and taking important economic decisions of the
company (Otley, 2016).
Evolution and subjectivity of management accounting:
The innovative concept of management accounting originated in late 1990’s when the industrial
revolution was at its peak and there was a need to recognize one of the systems which can assist
the company in generating value added reports and helping the investors and management in
taking their investment and management decisions. There was lot of subjectivity involved in
management accounting in comparison to financial accounting as it involves the forecasting of
future results and creating future plan of actions by interpreting the present as well as past reports
of the company.
Management accounting vs. financial accounting
Basis Financial accounting Management accounting
Objective The objective of financial
accounting is to generate
financial reports of the
company by utilizing the
accounting records (Renz &
Herman, 2016).
The objective of management
accounting is to provide
management with value added
reports for taking crucial
business decisions.
Sources The sources of information
utilized in financial
The sources of present, past as
well as future scenario are
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accounting relates to only past
data.
utilized in this function.
Users External users like creditors,
investors
Internal users of company like
managers, staff.
Regulations Required set of laws and
regulations as applicable to the
company (Quattrone, 2016).
No required set of reporting or
regulations to be followed.
Functions of management accounting:
Planning – The function helps in making the actions plans by utilizing the reports generated by
applying these techniques in the company.
Controlling – The cost reduction and cost control can be implemented by adopting the various
techniques of management accounting function in the production or distribution process.
Analysis and evaluation – It allows the company to evaluate the current performance in regard to
financial as well as non financial performance and position (Fayard, 2015).
Various types of system along with their requirements
System Description Requirements Example
Cost accounting
system
The information about
cost items of the
manufacturing
process is presented in
this system
The system requires
proper accounting
records of each and
every cost item
incurred in the
manufacturing
Determination of unit
cost of product and
preparing income
statement.
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process.
Financial accounting
system
The information about
the financial items of
the company is
presented in financial
statements (Lapsley &
Rekers, 2017).
The system must be
integrated with the
cost accounting
system
Statement of financial
position, Profit and
loss account
Management
accounting system
The function of
extracting, recording
and presenting the
management
information for
decision making.
The system should
enable in efficient and
effective decision
making.
Standard costing,
Variance analysis
reports
Tax accounting The system concerned
with maintaining the
tax issues of the
company in line
The other systems
must be aligned and
integrated with this
system (Rothaermel,
2015)
Tax journals produce.
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P2. Explain different methods used for management accounting reporting.
Cost accounting reporting – The cost reports of the company are concerned with presenting the
cost and revenue information of producing and selling the product or service of the company in
the market.
Example = A calculation of cost per unit for product A in the company ABC Ltd. is a good
example of this reporting (Oboh & Ajibolade, 2017).
Inventory management system – The inventory management system reports are concerned
with obtaining the correct or optimized level of inventory or finished goods to be maintained in
the company during the period. The economies of scale and just in time will be applied in this
reporting technique.
Example = Calculation of economic order quantity in ABC Ltd.
Price Optimisation system – The price optimisation system reports will involve determination
of the various demands and supplies required at different price level of the product or service
offered by the company.
Example = The calculation of demand and supply of the product at different price level and
determining its suitability.
Job costing system and reporting – The job cost reports are concerned with preparing and
presenting the cost and revenue reports for a particular product or job based on the specific
customer order.
Example = Cost of a car prepared on special order of customer under ABC Ltd. is an example of
job costing report (Rothaermel, 2015).
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Presentation and understand ability of the information:
The organisation must recognize the significance and importance of understanding the
information in the management accounting reports of the company as the information which will
be easily understood by the managers will help them in analysing the current business
performance and position in regard to the industry and market averages ad the decision regarding
the future viability and plan of actions can be taken accordingly. This will also require presenting
the information in an understandable way which is suitable in data format. The information of
assets and liabilities should be true and fair (Hill & Schilling, 2014).
Accuracy and relevancy of information:
It can be established that the management accounting information as presented in the reports is
of critical importance for the management for taking economic decision therefore it is necessary
that the information extracted should be accurate and reliable which has been extracted from
correct sources of the company. The failure will have negative consequences in the company
ABC Ltd. in the form of low profitability and high cost.
Benefits of system and the integration with organisational processes:
MIS – The management information system is the integration of the system, procedures,
hardware and people in order to extract and present the information by all working together in a
nutshell. The information helps in providing the basis of decision making at the management
level. There must be integration between these systems by aligning the objectives with
organisational objectives of ABC Ltd.
Benefits:
 Prompt decision making function
 Accessibility of databases as required
 Acts as a source for other information system (Fayard, 2015).
DSS – The decision support system is a high integrated information system which helps in
solving complex business problems with the help of knowledge database integrated in it. The
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system should be integrated by providing effective communication of the problems and the
knowledge required to solve these problems efficiently.
Benefits:
 Solving complex problems.
 Arriving at immediate conclusions.
 New innovative way of responding to problems (Oboh & Ajibolade, 2017)
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P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing.
The costing evaluation in the company is conducted by classifying various types of costs and
recognizing them for their occurrence and level of spending.
Direct cost – The direct cost incurred in the company refers to the cost associated with specific
production activity and it can be recognized separately for each product and service offered by
the company (Lanen, 2016).
Indirect cost – The indirect costs refers to the cost incurred generally and it can’t be recognized
separately for a separate product or service offered by the company.
Cost volume profit analysis – The cost volume profit analysis refers to the management
accounting technique in which the cost of the company will be analysed in reference to the
volume produced and profit accrued to the company. The various systems which are sub system
of this analysis are as follows:
 Product costing – It includes various costing techniques like normal costing,
actual costing, and standard costing and these costing system represents the process of
recognizing and evaluating the cost normally.
 Flexible budgeting – The flexible budgeting refers to the process of establishing
the cost budgets for the company based on different levels of activity (Christopher,
2016).
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Marginal costing:
The marginal costing technique of management accounting is related with establishing and
considering the variable cost of production for calculating the unit cost of product and the
marginal cost ascertained will be utilized for valuing the finished stock and inventory of the
company (Lanen, 2016).
The income statement of ABC Car Repairs Private Limited for January 2018 is as under:
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Absorption costing:
The absorption costing technique of cost accounting refers to the full costing system in which
different costs related to the manufacturing operations are considered together of calculating the
unit cost of production and finished stock and closing inventory is valued at full cost of
production. The same results in either under absorption or over absorption (Christopher, 2016).
The income statement of ABC Car Repairs Private Limited for January 2018 is as under:
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The reconciliation statement of the company has been presented below:
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Analysis:
The above reconciliation statement shows that the difference in net profits in both the costing
methods is due to the adjustment related with the inventory valuation which is utilizing marginal
cost in marginal costing and full cost in absorption costing (Christopher, 2016).
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P4. Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.
Process of budgeting:
1. Budget forecast – The forecasting of budget will require analysing the current situation
and performance of the company and estimating the desired level of performance in relation
to the objectives and goals of the company.
2. Budget designing and creation – The design of the budgets will require careful
consideration of various objectives and this shall result in cost reduction and cost control
activities (Renz & Herman, 2016).
3. Budget approval – The approval process of budgeting requires taking the approval of
implementing the designed budgets by an authenticated authority. Te senior managers of the
company are required to give their concern regarding this.
4. Budget implementation – The implementation of budget will require adequate and timely
provides of resources required to implement these budgets in the company.
5. Budget feedback and monitoring – The budget monitoring process will require
continuous feedbacks to be taken and monitoring the flexibility of the budgets in regard to
their optimality in relation with changing business conditions.
Different types of budgets:
Types of budget Description Advantages Disadvantages
Zero based
budgeting
The budgets are established
and created form initial
stage after considering the
zero level of expenditure
(Otley, 2016).
Actual considerations are
made and it avoids
redundancy.
Time consuming and
costly process.
Incremental The incremental budgeting The budgets results in The method is not
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budgeting refers to the establishment
of the budgets based on an
incremental rate while
increasing the expenses.
avoiding the funding
shortages.
suitable for profit
perspectives of the
company.
Capital budgets The capital budgeting is
associated with establishing
the capital budgets of the
company relating to capital
items (Lapsley & Rekers,
2017).
The long term associated
can be measured
appropriately.
The budgets are
irreversible and lack
integrity.
Operational
budgets
The day to day items are
reflected in these types of
budgets.
The budget helps in
maintaining the working
capital of the company.
It is really difficult to
operate control on
these budgets.
Behavioural implications of budgets:
The behavioural implication of the budgeting process is related with employees and staff
behaviours related tit e implementation of the budgets in their department. Generally employees
are resistant to change and they feel like budgets will be a source of keeping check on their
performance and this creates a sense of resistance among them. It results in various complexities
and fixed objectives have to be achieved which creates excessive pressure on employees
(Rothaermel, 2015).
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Cash forecasting: The cash budget for the company ABC is presented below for the month of
January, February and March:
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The percentage increase or decrease in the cash receipts or expenditures is presented:
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Analysis:
Expected cash payments of the company:
The operating expenses and the purchasing expenses have reduced and this represents the sound
prospects for the company in future scenarios.
Forecasted cash flow for the month of April 2018
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P5: Compare how organizations are adapting management accounting systems to report
financial problems.
The various types of financial problems concerning the organisations in the current business
scenario are concerned with cash shortage and cash liquidity aspect of the company together with
the fund management of the company. Also the organisational are facing critical problems
associate with inefficiency in inventory management and obsolescence of inventory in the
company (Oboh & Ajibolade, 2017).
The various tools suitable for responding to these problems are presented below:
Benchmarking – The benchmarking process of the budgetary control refers to the creation of
certain benchmarks based on different industry and market parameters on which the company
actual performance is evaluated and deficiencies are recognized in order to maintain the adequate
level of activity.
Key performance indicators – The KPI are utilized in ratios analysis of the company in which
certain key performance indicators which represent the continuous and smooth operations of the
business are obtained and the actions are performed in order to achieve those KPI. The ratios
analysis will be conducted in order to ascertain the financial position of the company in
comparison to the previous years and other competitors in the market.
Budgetary targets – These targets tends to be the most suitable way of improving the financial
performance of the company in respect of the profitability and solvency and liquidity aspect. The
budgeted targets will be established by the senior management of the company and the
implementation will be concerned with the operational staff of the company (Quattrone, 2016).
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Financial governance and sustainability of the company:
The financial governance of the company refers to the corporate governance prevailing in the
company and is associated with managing the affairs of the company that will enhance the
business performance and internal control operating in the company. The role of management is
crucial in determining the financial governance (Hill & Schilling, 2014).
The adoption of ratios analysis, variance analysis and identifying the key performance indicators
will allow the company to critically evaluate the performed and position of the organisation
during a particular period or at particular point of time. The deficiencies associated with the same
can be identified and appropriate measures can be taken to improve the operational as well as
functional performance of the enterprise. The same will allow the company to secure a
competitive edge in the market and thereby sustainability in the long run will be achieved by the
company (Fayard, 2015).
The budgets prepared for the activity of the year is as under:
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The calculation of variances in order to identify the business problems is presented below:
Sales variance = Actual sales – Budgeted sales = 2725-2730 = (5) Unfavourable [(350) – 345]
Sales volume variance (A) = (actual units – budgeted units) Budgeted price = (100-90)12 =120
Favourable
Sales volume variance (B) = (actual units – budgeted units) Budgeted price = (125-110)15 =
225 Favourable
Sales price variance (A) = (Actual price – Budgeted price) Actual quantity = (11-12)100 =
(100) Unfavourable
Sales price variance (B) = (Actual price – Budgeted price) Actual quantity = (13-15)125 =
(250) Unfavourable
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Conclusion:
It can be concluded that the management accounting function in the current business scenario is
crucial for balancing and improving the organisational performance and position in the
comparison of industry and market parameters. The various techniques of management
accounting will help in analysing the evaluating the business performance appropriately within
the company and the decisions can be taken accordingly. The budgetary control tools available in
the company will help in controlling the cost expenditure of the company and thereby the
company can secure a sound position and performance in the market along with the profitability
of the company.
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Bibliography
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