Management Accounting and Different Types of Management Accounting System

Management Accounting

Table of Contents

INTRODUCTION
MA is concerned with the presentation of accounting information in such a manner which
assist organisation in the creation of policy in order to undertake day to day operation in an
effective and efficient manner. Moreover, it enable company to assist managerial activities help
them in ascertaining financial planning for acquiring best position among competitive
marketplace (AlMaryani and Sadik, 2012). Along within this, its contains huge scope as it covers
the areas like financial and cost accounting, budgetary control, usage of statistical methods like
regression analysis and many more for maintaining better business position within an industry.
For this report, Alpha Ltd is considered which is one of the reputed medium sized company in
UK and it is mainly well known by its product i.e. pizzas which covers all age brackets across
the globe. In this study, it covers outline of management accounting along with its types and
methods, formulation of income statement, highlights pros and cons of different budgetary
planning tools. Finally, role of company in managing complex financial problems is also
mentioned here.
P1 Management accounting and different types of management accounting system
It is mandatory for each type of organisation to record financial transaction in order to
monitor their revenue and expenditure that is earned by an organisation in a particular time
period. This functions are done through management accounting and financial department of an
organisation. On other hand this functions are performed by internal departments of organisation
which determines that it is an important part for management. In context of Alpha Ltd financial
or monetary transaction is considered as one crucial decisions for this it is necessary for them to
include new methods and concepts of management accounting (Disney and Gathergood, 2013).
It assist them to control business's actions that is taken by management of Alpha Ltd through
evaluating their performance. Some different types of management accounting are mention as
follow:
Inventory management system- Inventory management works as an effective accounting
management system which is used by organisation to manage their inventory. This system helps
an organisation to deliver their stock within minimum time period. For Alpha Ltd inventory
management system is beneficial because it work as a discipline method that specify needs shape
of goods according to need of customer's. On other hand inventory management is required at all
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locations where organisation operates their business in order to predate their regular stock of
materials.
Cost accounting system- An effective cost accounting system is execute by manufacture
and organisation to record cost of their production activities. This works as a framework that is
used by firms for predicting cost of their products through recording them regularly.
Management of Alpha Ltd uses cost accounting system to decide profit margin on their products
through analysis cost of their operations for making inventory and products. Moreover this
system perform an critical role for operating profitable business's in market through deciding
their profit margin. Another factor assist organisation to analyse price of product and inventory
for manufacturing product. By doing assessment, it has identified that company can determine
price by using cost accounting system. Moreover, it clearly indicates unit price associated with
the operations. Thus, by adding mark-up in unit cost firm can set optimal price for the product or
services.
Price = Unit cost + (cost * mark-up%)
For instance unit cost is £50 then price will be
Price = 50 + (50 * 20%)
= £50 + £10
= £60
Accordingly, by offering products at the price of £60 firm can get desired profit margin.
Job Costing system- This is also known as order costing. This work as a system that is
used to assign and accumulating operational cost of particular unit and batch which is
manufactured by organisation. In context of Alpha Ltd job costing system it is beneficial for
organisation because it helps them to identify cost of various item which is different from each
other. With help of this it is easy for organisation to identify profits for each specific unit of
organisation. On other perspective with order costing organisation decided prices and
manufacture each product unit according to need and demand of customer's (Hawkey, Webb and
Winskel, 2013).
Price optimisation system- Price optimisation accounting system assist an organisation to
formulate an effective framework which helps management for identifying price of their
products and services. Moreover this system is beneficial for organisation as well as customers
because it decided price through mutual concern of all departments. It determines prices which is
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decided by organisation is fair and includes marginal profits. So it attracts more number of
customer's through charging minimum prices from them. Within circumstances of Alpha Ltd
price optimisation system leads management to make effective decisions by asserting unbiased
prices from them. In the context of business unit, price optimization system is required with the
motive to setting down appropriate pricing framework. Moreover, when company charges higher
prices for its offerings then it may result into low customer base and lack of competitive
advantage. On the other side, in the case of setting high low prices profitability of the company is
affected negatively. In this way, by undertaking this system business unit can set suitable prices
as per customer’s preferences and thereby would become able to get desired level of outcome or
success.
P2 Methods of management accounting reporting
Management Accounting focuses on information provided by financial accounting for
decision making (Henttu-Aho and Järvinen, 2013). Management Accounting reports facilitate
planning, decision making, regulations etc. these reports are based on financial accounting &
reporting which are prepared throughout the year as all the facts and figures need to be
considered and accuracy requirement is high. Various methods of management accounting
reporting followed by Alpha Ltd are -
Budget Reports- Budget reports are those managerial reports which are used to analyse
the performance of the of the organisation. They can be prepared department wise, activity wise
for a specific period of time. Alpha Ltd prepare a overall budget on the basis of past experiences,
it includes all the possible income and expenditure for the specific time period. These reports
help them to plan for reduction in expenditure and to identify funds requirement. Moreover this
helps an organisation to control prices of all activities that is performed and organised by
management to attain their goals.
Cost Managerial Accounting Reports- In cost report all the cost related to raw material,
labour, overheads are included which gives a clear picture of total cost incurred in production
process. When total cost is divided by total output it gives per unit cost (Kanellou and Spathis,
2013). Alpha Ltd prepare this report as it facilitate them to identify all the cost and profit margins
so that they can optimise the use of resources by reducing the wastage in terms of inventory,
labour hours etc. This types of cost accounting report helps an organisation to estimate price of
their products which is manufactured by them.
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Account Receivable Ageing Reports- These reports are prepared to keep a check on
debtors. When organisation provide frequent & large credit then this becomes so important.
Alpha Ltd prepare this report to identify the debtors who can default in future and to improve the
collection process. Also this helps in planning and creating provisions for bad debts and to
decide the extent for which the credit can be extended to a few parties.
Execution reports- Management account develop and utilize plans for constant and
genuine use of income through including all planned sums. After developing new budget for
organisation all changes are predicted and recorded to make an effective report. Usually this
reports are formulated on annual basis in an organisation (Lavia López and Hiebl, 2014). While
in context of Alpha Ltd they operates their businesses in beverage industry. So it is mandatory
for them to decide price of their products because it enables them to match their product demand
with upcoming future along with cost additions.
M1 Benefits of management accounting system
Management accounting system Benefits
Price optimisation system Accounting system leads an organisation to
analyse prices of their products through
implementing effective decisions. For Alpha
Ltd it helps them to delegate products
effectively.
Cost accounting system Cost accounting system is developed by
organisations for calculating the overall cost of
organisation. Further this system is used by
Alpha Ltd to decide price of products through
analysing its in-depth information (Lovat and
Zhang, Sharp Laboratories of America Inc,
2013).
Job costing system An organisation develops several types of
products in order to offer them in market.
Therefore this is mandatory for Alpha Ltd to
identify prices of products on individual’s basis
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