Management Accounting Systems and Reports

This assignment delves into the realm of management accounting systems, examining key components like inventory, cost, job costing, and price optimization methods. Furthermore, it analyzes essential management accounting reports such as budget reports, accounts receivable reports, inventory control reports, accounts payable reports, and performance reports. Students are tasked with understanding the functionality and importance of these systems and reports in businesses.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1. Management accounting system and essential requirements of its different types..............1
P2 Methods of management accounting reporting......................................................................4
TASK 2............................................................................................................................................7
P3 Difference between income statement made through marginal and absorption costing........7
TASK 3 ........................................................................................................................................10
P4 Advantages and disadvantages of planning tools which are used for budgetary control....10
P5 Adopting management accounting systems for responding financial troubles .................12
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

Report
From: Management Accounting Officer
To: General Manager
Subject: Report covering management accounting system and reporting along with different
costing techniques for enabling organization to implement them.

INTRODUCTION
The system of recoding, analysing and using financial data and non-financial information
is known as management accounting. In the modern business era, companies are facing different
kinds of problems relating to managing their resources (Ahmad and Mohamed Zabri, 2012).
Managerial accounting focuses on expertise and assists an organisation in increasing their profit
by lower down the overall cost of operations and other activities. It also helps managers in
expanding enterprises by finding new ways of enhancing sales. There is a big difference between
management and financial accounting where first one is for growth of business while other is for
external stakeholders. Taj stores is situated in London. They are running a grocery shop which
started in the year 1936. Their employee’s strength is less than 50 and turnover is below 500000
pounds. This project will give complete explanation about different management accounting
systems. Some reporting methods will also become an important part of this assignment. Major
difference between marginal and absorption costing will get covered in the mid part of this
report. There are various planning tools which manager can use for controlling the budget and all
will be explained in this file (Aminbakhsh, Gunduz and Sonmez, 2013). At the end, this project
will talk about financial problems and their solution by management accounting tools and
techniques.
TASK 1
P1. Management accounting system and essential requirements of its different types
Making profit in this business world is not a difficult task if an organisation knows all
correct manner of managing all available resources. There was an era when companies try to
focus only on their financial activities because they think that if they will manage monetary fund
properly then they can find out solution of most of their troubles. But, with time, new business
issues have raised because of various reasons like globalisation and swift changes in rules made
by government, high competition, etc. Management accounting has many perks that assist in
forecasting and playing a crucial role at the time of making decisions relating to buying or sale of
investments. Cash is an important asset of company and tools of managerial accounts predict
need of this liquid asset at a particular time period. Financial accounting is mainly used for
showing stakeholders that firm has successfully achieved mentioned goals and if they fail to
reach these targets (Chen, Weikart and Williams, 2014). There are many differences between
managerial and financial accounts that are shown as below:
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Financial accounting Management accounting
Its main aim is to convey the performance of
company to stakeholders.
It is made by managers of the firm so that they
can analyse different kinds of data and make
right decisions.
Principles of GAAP are applied for making
various reports.
There are known principles and organisation
can make it in any possible way which they
want.
Only quantitative data is used in financial
accounting.
Both qualitative and quantitative data are
utilised in managerial accounts.
All the departments are covered in this section. Specific division, which is relevant to
profitability, are taken in account in this
process.
Complete information or data in these accounts
is highly accurate.
Sometimes, information is present in
approximate figures.
Small enterprises always face problems relating to funding. As they know that they
cannot get much funds so, manager of these firms Taj stores focuses on different management
accounting systems which can assist them in different areas of business. They are as follows:
Price optimisation – Production cost of every item is different. Their market rate is also
dependent on manufacturing expenses. This system plays the key role on decision price of
various products which prove to be the best for customers as well as company. Buyers never buy
a good, rate of which is high for them. This ultimately results in low sales as well as profits also.
Other option for enterprise is that they can sell it at low value but, in this case, organisation
would not earn a decent amount of revenue and they will miss their short and long term targets.
Cost accounting system – Significance of costing has grown in the past two decades as
many multi-national corporation like Toyota earned benefit of competitive advantage by working
on different methods for reducing cost of production. This management accounting system is
capable of increasing the profit by identifying and removing wastage of resources. It also
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provides information about profitability by analysing various factors which are unnecessarily
enhancing the total cost (Cokins, 2013).
Inventory management system – Taj stores is a small firm; they do not have much
employees. If they will use inventory management software then they can keep all the records
relating to goods that have entered in stores and that are present in warehouses. This system
delivers information about the right quantity of goods that an organisation should keep in the
store. Tracking of all commodities can be done by using this technique. If manager of Taj stores
will buy this software then they will get an exact idea about the profitability of every product
which they are selling in their shop. All the problems regarding supply chain can get resolved if
an organisation adopts this system (Zoni, Dossi and Morelli, 2012). Latest technology can be
considered as an essential requirement for this management accounting procedure but small
enterprise can also use old software as their area of operations is limited.
Job costing – This system gained popularity in the last few years because it directly
makes a positive impact on the profitability of business. In job costing, contribution in profit of
every 'job' is checked so that manager can identify all work which is increasing revenue and
decreasing 'Jobs' which are not important for company and putting burden of additional cost on
organisation.
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Management
Accounting
system
Inventory
management
System
Cost
Accounting System
Job Costing Price
Optimisation

Application of management accounting system to the chosen company:
Price optimisation - Taj stores are selling many items in their shop and by using this
system, they can decide the right price of every product. This will positive affect their profit can
their number of customer will also increase because they will find goods at a price which they
can happily pay (Renz, 2016).
Cost accounting system – Taj stores can apply this system for identifying various areas
where they can decrease wastage of resources. If they will adopt it then their total cost of doing
business will go down and profit will go up.
Inventory management system – For a grocery store, managing stock is very important
because it is directly connected to their sales. By using this system, they can keep right good and
their proper quantity in the stores.
Job costing – Some ''jobs'' at Taj stores may not have any major role in earning profit.
This report can identify these jobs and increase those ''jobs'' who have ability to enhance more
profit of the company.
P2 Methods of management accounting reporting
Management accounting reporting is the process of presenting different kind of reports to
the manager so they can analyse them and, in future, make effective plans by using it (Delafrooz
and Paim, 2011). Report shows all the activities which is done by the company in past period but
for a particular time. Below is the importance of management accounting reporting:
 It assist managers in finding various kind of mistakes which company is committing
regarding managing inventory, debtors and creditors.
 These reports can be used for making future strategies so strong plans can be made for
achieving long term goals.
 These reports support all the divisions and they assist in forming a systematic procedure
so all the work can be done in best way possible.
Following are some popular type of management accounting reports along with their importance:
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Account receivable reporting – This report is made for finding the amount which
debtors will give to the company. It contain whole details about how much money organisation
has receivable up-to a particular date and what are source of these funds. Making this report is
essential for enterprises because it assist them in managing the monetary resources is right
manner. The prime important of this report is that it can reduce the amount of bad debt by
finding and making hard rules for debtors who are not paying the money which they have have
to pay for purchased good to the firm. This report can be used at the time of calculating the need
of cash in business.
Accounting payable reporting – Every company have some suppliers. These are
stakeholders who play crucial role in success or failure of enterprise because the raw material or
goods supplied by them are sold to the customer. Under this report, information about amount
which company has paid to creditors is mentioned and it also shows data of the sum which
company have to pay to their supplier in upcoming time. Major significant of this report is that it
can assist in making a procedure where company pay due amount to their creditor is promised
time. This make a huge positive impact on relationship between organisation and their suppliers
(Ekbatani and Sangeladji, 2011). Having good relationship with vendors help in forming strong
supply chain management. A/C payable has high significance in finding right supplier for
company i.e. who provide good quality of goods at low price.
Inventory control reporting – Inventory is the unsold goods which is company want to
sell to their customers. This report reveal data regarding stock which was sold in a period of time
and unsold inventory which is present in warehouse. Performance of some important techniques
of managing stock like EOQ is checked under this report. Main advantage and use of this report
is that it can resolve most of the major troubles relating to overstocking and under-stocking of
goods. By utilising this document, company can analyse the demand of particular good which
they should should keep and sale in their stores. They will also get information about right time
and exact quantity of goods which should be ordered by enterprise.
Performance reporting – Analysing performance of every department and employees is
main target of this form of reporting. Making it is important because company can use it at the
time of deciding incentives and promotion of workers. Every division has some target, this report
depict whether they have reached it or not and how close or far they were to the aim. If
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organisation will not make this document then they will never know how their employees
performed and what blunder they have committed in particular time period.
Budget reporting – Budget is most common from of report. It is important to make this
report as it provide all the information about company's work and performance and it also reveal
income and expenditure both expected and actual. Prime use of this report is done in finding
deviation. This report is important because it assist in making future strategies. It company
would not make this document then their whole operation can go off the right track.
Applying management accounting reporting to chosen firm
Account receivable report – Taj stores can decrease the amount of their bad debts by
constructing this report. If they make it, then they can find debtor who are regular defaulter and
they may take decision to not sell good to them on credit (Foster, Hart and Lewis, 2011).
Account payable report – Formation of A/C payable report show details about supplier
who can be trusted. It will also provide all the information about payable and paid sum to
vendors. By using this report, Taj stores can make payment to their vendor on decided day and
this will result in fine relationship with them.
Performance report – Taj stores do not have more than 50 employees. Performance
report will assist them in analysing employees and other division work so their promotion can be
done accordingly and their incentives can be decided for upcoming time.
Budget report – Taj stores may have some problem for making budget report because it
is bit expensive and time consuming but they should make it as it will show them right path to
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Methods of Management Accounting Report
Budget Report
Accounts receivable
Report
Inventory
control report
Account payable
report
Performance report

follow and work of all the employees can be synchronised by removing confusing and conflict.
Separate funds are allotted to every wing or worker in under this budget.
Inventory control report – All the issues of Taj stores regarding extra stock or scarcity
of inventory can get resolve by taking use of inventory report.
TASK 2
P3 Difference between income statement made through marginal and absorption costing
In today's business environment, income statement can be made by adopt different
management accounting techniques like marginal and absorption costing. Prior one is modern
concept and it concentration on assisting in making managerial decisions while later one only
deal with production activity (Fullerton, Kennedy and Widener, 2014).
Marginal costing – In this technique of management accounting expenditure incurred on
manufacturing of additional goods is taken in account. Variable cost is treated according to the
cost unit but fixed expenses fully written off from total contribution.
Absorption costing – It does not matter whether an expenditure is fixed or variable, under
this management account technique, all the expenses is considered for product cost. Allocation
of cost per produced unit is the main concept behind absorption costing.
Marginal costing Absorption costing
Inventory is valued by considering only
variable cost.
For inventory valuation, total cost is taken in
account under this technique.
Accounting standards do not allow this
technique for valuation of stock if, it is to be
submitted to government authority.
This approach can be adopted by a company
for valuation of inventory because it is
permitted under accounting standards.
It is formed for internal use i.e. for making
right decisions.
Absorption costing is for external users.
Fixed cost is taken as period cost. Fixed cost is part of product cost of each unit.
Calculation as per Absorption costing.
Working notes:
Absorption costing
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Working 1: Calculate full production cost
Direct material £6
Direct labour £5
Variable cost £2
Fixed cost £3
Total £16
Working 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*19 = £13300 100*16 = £1600
Working 3: under/ over absorbed fixed production overhead
Actual fixed production: £2100
Fixed overhead: £2000
Total £100(over absorbed)
Administration Cost: In this budgeted cost is £800 and Actual cost is £700
Selling cost: In this budgeted cost is £400 and Actual cost is £600
Net profit using absorption costing £ £
Sales
(-) Cost of Sales:
Opening stock
Manufacturing
Closing stock
(Under)/ Over absorbed fixed prod.
O/h
Gross Profit
Less Expenses
Variable sales expenditure
0
11200
(1600)
600
700
21000
(9600)
11400
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Fixed administration expenses
Fixed selling expenditure
Over absorption
Net Profit
600
(100)
(1800)
9600
Working 1: Calculate variable production cost £
Direct material 6
Direct labour 5
Variable production O/h 3
Variable production cost 14
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
0 700*14 = 9800 100*14 = 1400
Net profit using marginal costing £ £
Sales value
Less: Variable costs
Opening stock
Manufacturing
Closing stock
Contribution
Less Fixed costs
Variable Production expenses
Administration cost expenditure
Selling cost
0
9100
(1300)
2000
1300
600
21000
(7800)
13200
3900
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Net Profit 9300
This organisation should adopt absorption costing because this technique will provide
them a net profit of £9600 to the organisation while marginal approach will give profit of £9300.
This reason behind this difference in marginal costing, fixed cost get completely write off against
profit but this system is not followed in absorption costing and fixed cost is allocated to all the
produced goods in equal amount. Another impact of this treatment of fixed asset is related to
closing stock. Fixed cost incurred on unsold stock in absorption costing does treated in this year
so the total amount which should be deducted from contribution is less in this management
accounting technique but, in marginal, fixed cost of closing stock is deducted in same year
because it is period cost and this difference in both concept is prime cause of variation in net
profit i.e. £300 (Higgins, 2012).
TASK 3
P4 Advantages and disadvantages of planning tools which are used for budgetary control
Budgetary control is ''control technique'' where comparison between actual results and
budgeted work is done (What is Budgetary control? 2017). Responsibilities of all the individuals
who are either related to controlling action or making changes in budget set in order to make sure
less deviation from original plan in forthcoming time. Making effective plans requires use of
various tools, the work of forthcoming and making contingency plans (provision) is done by
using planning tools. They are as follows:
Zero based budgeting – This planning tool has some unique features which separate it
for all other tools. Normally people think that in this approach, budget is made from zero i.e.
scratch but it is lot more then it (Hirth, 2013). Responsibility of all the manager are set in it and
they have to give valid justification for all the activities which requires money. It does not matter
whether they are doing these activities from a long time or started in recent time, if they fail to
justify and cost then they would get money for it.
Advantages – ZBB strict focus on best use of financial resources by not allotting funds to
the activities which are unnecessary enhancing cost and increasing wastage of money.
Productivity and efficiency of complete organisation get enhancing by using this planning tool. If
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a flexible approach and it assist in linking objectives of various division with organisation goals.
If Taj Stores will adopt this tool then their overall performance will improve because ZBB put a
positive psychological pressure on managers to reduce wastage resources and increases their
participation in decision making process.
Disadvantages – ZBB consumes lot of time and it involves lengthy procedure. If manager
are do not managerial skills and they do not under organisation in right way then they cannot use
ZBB (Lambert and Sponem, 2012). Sometime justifying new ideas is difficult, if zero based
budgeting is adopted then company may fail to innovate new product, service or strategies. Taj
stores do not have much employees. Their manager may fail to use this tool because some
procedures involved in it like, ranking of decision package, need high expertise. Adopting ZBB
may result in wastage of time and money for this firm.
Activity based budgeting – This is a process where budgeting is done without use
historical data. Instead of concentrating on function, focus is kept of activities which can increase
operational efficiency of the company. Its process involve 3 steps, first is finding all the activities
and their cost driver. Determine number of units is second step and last is to find cost per unit of
activity.
Advantages – ABB ensures greater degree of control which is very important in
budgetary control. It provide realistic budget, any deviation in actual and planned income or
expenditure can easily be explained through this technique. This approach show right direct to
the manager and it urges company to focus on increasing their efficiency instead of concentrating
on uncontrollable activities (Langevin and Mendoza, 2013). Taj stores can grow with high rate if
they use ABB because it will help them in bifurcating significant and insignificant tasks.
Disadvantages – For ABB, substantial resources are needed. If it is implemented by Taj
Stores for one time, then they have to spend huge sum in maintaining it. Chances of
misinterpretation in ABB is high, it can become main reason behind making wrong decisions.
GAAP do not support reports which are made through this planning tool. Number of
assumptions is high in this approach and this is not good for small enterprise like Taj stores.
Incremental approach – This is an old tool where new budget is made by making
essential changes in previous budget. Some significant components are considered under like
rate of inflation.
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Advantages – Their is no major difficulty in formation of this budget. Changes are done
gradually in it and impact of their alteration can be seen in less time. Understanding this budget
is easy and chances of conflict between various department is less because all division get
similar funds. Taj stores can adopt it as it is easy to implement and its construction is also simple
and less time consuming. They are small company and this approach will perfectly suit them.
Disadvantages – It run on an assumption that most of the work will be done in same way.
This can result in making big mistake at the time of making decision relating to major investment
(Maiyaki, 2011). If manager of Taj stores will get somehow reduce cost then they would not get
any kind of incentive for their good work under this planning tool.
P5 Adopting management accounting systems for responding financial troubles
Financial problems is related to the issues regarding money. It can happen because of
many reason which can be in internal as well as external. Internal one arises because of poor
performance of managers or failing to implement decided plans while external issues happen
because they changes in businesses world like up-gradation of technology, political and social
changes etc. Comparison between Taj stores and Vectair holding, an organisation who is using
traditional approach and dependant on financial accounting.
Taj stores Vectair holding
They have adopted modern method of reducing
cost of conducting business like lean
accounting which support them in earning
competitive advantages.
They only concentrate on using financial
accounting and other traditional approaches.
This company uses management accounting
system for making quick and right decisions.
Traditional approach does assist manager of
this company as its prime focus is on collection
and presentation of data.
Morden tools like KPI, Benchmarking,
Financials tools are used by them for resolving
financials problems.
They do not using these kind of system and
tools.
They are working on latest technology and
soft-wares.
They are dependent on old tools of
management accounting which have low
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effectiveness in present time.
Following are some financial issues and system for resolving them:
Profitability – Every company want to earn more and more profit. Facing loss create
troubles for them and if they register loss for long period of time then they have to may to close
their business operation (Moser,2012). For Taj stores, managing stock is crucial. If they will not
keep good collection in appropriate quantity in their stores then they cannot yield high profit.
Inventory management system and reports have ability to provide correct solution of this
problems because they can reveal best quality and quality that should be present in store.
Price maximisation – Problems is setting best price of an item can be solved through
price maximisation system. It can reveal exact rate of a product on which seller and buyer can
agree.
Cost efficiency – Cost accounting system can increase efficiency of complete
organisation by minimising wastage of significant resources.
Performance and control – Management accounting report basically do the work on
controlling and checking performance of all the employees and department. It also reveal current
present so they can avoided in future.
KPI – Key performance indicators are used for measurement of performance and
checking effectiveness of organisation performance regarding their attainment of long term
objectives. SMART target can be considered as key solution of financial problems (Parker,
2012). Taj stores can set a target that they will increase their sale by 15% and time limit for it
will be 2 years. Their performance can be measured by making a comparison with past years
result. This aim is realistic and it can be achieved through hard work. It will finish problems of
profitability and other main financial troubles.
Benchmarking – Taj stores can set a standards for taking loan like they will not raise loan
for more than 5% interest rate because it is a benchmark which is followed in whole industry.
Benchmarking is a concept of following set standards which are present in a sector.
Financial governance – If Taj stores will follow are legal and ethical rules then they can
minimise their financial problems. If they will conduct internal audits on quarterly basis then
they can stop major financial problems like misuse of funds at its generation moment (Qian,
Burritt and Monroe, 2011).
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CONCLUSION
From the above report, it can be concluded that marginal and absorption are two kind of
approaches of management accounting. Planning tools are used for controlling budgetary
expenditure in correct way. Report and system of management accounting system are utilised for
making right call.
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