Management Accounting and Earnings Management

This assignment delves into the relationship between management accounting practices and earnings management. Students are tasked with analyzing various techniques used for earnings manipulation, such as real activities manipulation and accrual-based earnings management. The assignment also encourages critical thinking about the ethical implications of these practices within the context of financial reporting and corporate governance.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK1.............................................................................................................................................3
P1 Explain management accounting and their different types of management accounting
systems........................................................................................................................................3
P2 Explain different methods used for management accounting reporting ...............................5
P3 Prepare an income statement using marginal and absorption costs.......................................7
TASK 3..........................................................................................................................................11
P4 Advantages and disadvantages of budgetary control planning tools...................................11
P5 Comparison between how organisation could use management accounting so as to respond
to problems related to finance...................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES .............................................................................................................................17

INTRODUCTION
Management accounting is a process that is used by the management in order to identify
and present the financial information in an efficient manner. On the basis of this data, manager
can make their plans and can take decisions so that they can achieve profits. This is more useful
for the internal manager and executives as through this they can control their expenses. The top
management can use this information in order to forecast the data on the basis of the past
information (Brosel, Toll and Zimmermann, 2012). Through this, they will be able to improve
their growth and brand position in the market. The present report is based on Apis Limited which
perform their operations in hospitality industry. They are focusing on their business activities so
that their overall performance can be improved in an efficient manner. In this context, report
explains the different types of management accounting system and methods that are used in order
to manage the overall accounting system. Along with this, it explains the cost techniques that are
used to prepare to income statement. The advantages and disadvantages of the different planning
control techniques and budgetary control are explained in detail.
TASK1
P1 Explain management accounting and their different types of management accounting systems
Management accounting refers to preparing or managing accounts, that provides straight
and timely financial content to the managers. It is helpful for them to take short term and day to
day decisions. Although management accounting, also provides annual reports to the external
stakeholders. Apis Ltd. also prefer to use to managerial accounts and financial reports. These
reports are related with sales revenue, available cash in organisation, accounts receivable,
accounts payable, outstanding debts, raw material; amounts of others in hand and inventory. It
engaged with the planning of information that is helpful to the managers in planning and
controlling their business operation's. It is also accommodating for those only peoples who are
involved in decision making process (Briciu, Groza and Ganfalean, 2009). Apis Ltd. Industry
mostly uses management accounting system to meet requirements of managers regarding with
financial reports and data. It is an internal function of any business and which is responsible for
reporting and collecting any financial information.
It is a activity of presentation, analyse and interpretation of financial information in order
to assist the process of management as daily operations, policy creation and decision making.

The objective of management accounting is allocation of resource and analyse the risk in order to
exploit the risk. It is also helpful in measuring performance of employees and measurement of
efficiency of employees. Management accounts also lean in providing content about execution
that is more often than financial accounts (Michalski, 2012). So management accounting is
based on cost and financial accounting. Management accounting is system of financial
statements through ration analysis. The main of management accounting is financial planning of
each and every activity that is related with economic resources of the business. There are
different types of management accounting; - Cost accounting system: A cost accounting system is tool which is used to assess the cost
of the product in order to make the profits in a most optimum manner. However, there is
no such tool which can be used to ascertain the appropriate cost, but by applying the cost
accounting system, company could attain the idea to reduce the cost of a product. Now,
there is a strong need to know about the product cost in order to make the product
profitable. Job costing system: Under this costing technique, there is need to know the
manufacturing costs individually for each job. This technique is useful for the firms
which are engaged in the manufacturing process. Batch costing system: this is the technique which is used like job costing technique. It is
a kind of specific order costing technique. Under Each batch, there are so many units are
covered. So, there is need to assess the total cost of the batch. Inventory management system: This system is used to know the inventory levels, orders
and deliveries. This is the system which is used to assess the stock and manage
accordingly.
 Price optimisation system: This is the system which is used to identify about the
consumer’s reaction at different at the various prices of the products or services.
P2 Explain different methods used for management accounting reporting:
These methods are regulating by Apis ltd. In management accounting process. They are
such as follow: -

Make or buy decision- the make or buy decision concerns with choosing among
manufacturing a product in industry and purchase it from another supplier. The most important
factors in make or buy decisions, that they are regarding with the part of numerical analysis. In
that products are associated with production costs and whether business have the ability to
produce at require levels. Basically every item which is presently buying from an external seller
is a person for internal production and every part which is currently factory-made in house is a
latent candidate for acquisition. Make and buy decision are basically take in the basis of prices.
But is is only single criteria which is to be measured in strategical decisions.
JIT:- It is also known as Toyota production system. Just in time method is a
merchandise strategy of industries. Apis Ltd. Prefer such kind of strategics. In that increasing
employee’s effectiveness and his efficiency and decreasing wasting by establishing good
production methods. It is helpful in reducing inventory costs and provides producers to
forecasting of demand accurately. A good example if JITN is a car manufacture that functions
with very low product levels and relying on its supply chan. It makes ease up the production, by
this procedure can move one product to another very easily (Dechow, Myers and Shakespeare,
2010). Just in time method also reduces cost by destroying wastage keeping needs. It is a
management philosophy, that is used by managers to reduces wastage in production system by
using new techniques and strategies. There are several types of reducing wastage. Such as
inventory wastages, waste of motion, processing wastage, transportation wastage, wastage of
waiting time and waste from overproduction. Apis Ltd. Must have to make plan and strategics
to stopped these wastages that can ease up the production cost and production process also.
Activity based costing- ABC analysis is the managerial accounting methods that
accommodating in identifying the activities on which a firm is performed and it assigns
production's cost. It recognizes the relationship between product, cost and activities and through
this, ABC also assigns indirect costs of products makes less randomly than conventional
methods. In Apis Ltd. ABC found its place in today's manufacturing sector. Mostly hospitality
industries prefer to usage ABC analysis, because it extends the dependability of cost data. Th
method is used in profitability analysis, product line, target costing, service pricing and product
costing (Cohen and Zarowin, 2010.). If cost of product is better grasped, so organisations can
make convergent strategics. Under this system, any activity can be considered as an event or a
transaction. These activities are consumed as considers cost objects and elevated resources.

Inventory Management: - Inventory means an idle stock of goods and services that
would be transform in an item. For Apis Ltd. It is very essential thing manages its inventory and
stocks. The main of this method it is to reduces wastages in production. It determines the impact
of financial activities on balance sheets and health of supply chain management. Every
organisation continuously to maintain inventory by applying various methods of productions.
The main impact of inventory management is on financial figures of the business. (Hillier,
Grinblatt and Titman, 2011.) Because inventory is flexible and dynamic Inventory management
defines the evaluation of internal and external factors, constantly and carefully and controlling
through preparation and reviewing.
Many organisation prefers a separate department for inventory managers, who are
constantly planning and managing inventory and interact with procurement, financial and
production departments.
There are some different methods which can be used by an enterprise in order to make a
management accounting report. Some of these are as follows:
Sales report: It is a kind of report which includes data of products and services sold in
the market at particular time frame. This can be prepared for monthly and quarterly so that data
can be managed in an appropriate form.
Account receivable report: This can be prepared by companies in order to manage their
cash flow. This report is based on the balances that are credited to the customers. Along with
this, most of these are prepared on the basis of aging that in what duration the consumer
repayment the amount.
Performance report: These are prepared monthly or quarterly as per the need of
companies. The accountant prepare budget in order to compare their actual expenditure with the
total revenues that are generated by them after performing some operations. so, in this manner
Apis Ltd will be able to evaluate their current performance as compare to their past data.
Inventory management reports: The business organization can use these reports in order
to maintain their inventory level. This includes some factors such as labour cost, inventory waste
and overhead cost. By preparing this, manager can make the improvements at the workplace so
that their performance can be improved.

Job cost reports: This report shows the expenses which are related to particular project.
The total expenses are estimated on the basis of revenues so that profitability can be achieved.
Through this, time can be saved and cost can be reduced.
M1
These are benefits of management accounting. Such as: -
 Reduces Expenses: - If Apis Ltd. Industry manages their expenditures and also managing
reports of financial data, it would be lower their expenses in their operations. It also
improves the cash inflow of the organisation by creating m,aster budget for whole
expenses(Burritt and Schaltegger, 2010). It allows managers to find out how much
money and its cost on production.
 Increases financial returns: - Managers can increases their return son investments by
forecasting consumers demand and prices changes & its effects on economy. In
management accounting, Managers, makes budget annually and taxation for each and
every task of the organisation to analyse the computation of variants.
 Ease up the Decision making process: - It is simplifying the decisions making process, by
using past data (Badertscher, 2011). Financials reports and statements are able to take
appropriate decisions for the betterment of the business.
 Financial Analysis and interpretation: - Management accounting is a study of financial
statements and reports and it is essential is strategic decision making process. Many
managerial executives do not have good technical knowledge. So management
accounting provides them to different policies and information in terms of financial
decisions.
D1
There is some reason, that are helpful in evaluating the management accounting system.
Such are as follows: -
 Helps in preparation of plan- Management accounting describes the analytical evaluation
of financial data and reports for an organisation. It is conducting a plan or set aims &
goals on the basis of forecasting.
 Better services to customers: - If managers have proper knowledge of market, they also
know customer's taste and choice. So they trying to produces according to same. And

then customers can easily meet with their needs and wants by consuming quality products
and services.
 Measurement of performance: - The techniques to budgetary controls, in standard costing
able to measure the performance of employees. It is also helpful in analysing the
efficiency of the employees.
P3 Prepare an income statement using marginal and absorption costs
Apis Ltd can use different cost analysis techniques in order to prepare an income
statement. These tools and techniques are:
Absorption costing: It is a kind of technique that is used by an enterprise in order to
calculate their overall cost by focusing on the direct and indirect expenses. Through this, an
organisation will be able to calculate the overall cost for manufacturing the products and total
labour cost. The firm will be able to manage their overall operations so that net profits can be
calculated in an efficient manner.
Income statement for Absorption costing method
Selling Price £35
Unit costs
Direct materials £6
Direct Labour £5
Variable Production overhead £2
Variable sales overhead £1
Budgeted production for the period is 600 units
Fixed cost for a month:
Budget cost Actual cost
Production overhead £1,800 £2,000
Administration cost £800 £700
Selling cost £400 £600

Sales (35*600) 21000
less:
Cost of Production (6+5+2) -9100
closing stock (100*13) -1300
variable cost -7800
Contribution 13200
less:
variable sales overheads (600*1) -600
fixed overheads -2000
Admin & selling cost (700+600) -1300
-3900
NET INCOME AS PER MARGINAL COST 9300
NET INCOME AS PER ABSORPTION
COSTING:
Sales (35*600) 21000
less:
Cost of Production 9600
Gross Profit 11400
LESS:
Fixed and variable cost:
variable sales overheads (600*1) 600
Admin & selling cost (700+600) 1300
less;over absorbed fixed production overheads -100 -1800
NET INCOME AS PER ABSORPTION
COSTING: 9600

Marginal costing: Marginal cost is the alteration in the opportunity cost that increases
when the increment of one unit in the quantity produced is examined. Simply it is the price of
constructing one more unit of goods. The variable costing includes costs of labour and the
material, plus an estimated part of stable costs like management elevations and selling charges
(Renz, 2016).
In some corporations where average costs are really persistent their marginal cost is simply
equating the average cost. This idea of marginal cost is quite important in resource assignment.
Marginal cost is the alteration in the opportunity cost that increases when the increment
of one unit in the quantity produced is examined. Simply it is the price of constructing one more
unit of goods. The variable costing includes costs of labour and the material, plus an estimated
part of stable costs like management elevations and selling charges.
In some corporations where average costs are really persistent their marginal cost is
simply equating the average cost. This idea of marginal cost is quite important in resource
assignment.
M2
Apis Ltd can use management accounting techniques in order to improve their financial
growth in the market. The hospitality industry has approx 50 employees and their turnover is
£500, 000. So, in order to increase their turnover, they can use some of the functions in order to
enhance their overall performance. Some of these techniques are:
Absorption technique: This is a kind of technique that is used by an organisation so that
they can they can calculate their overall expenses. Through this, they will be able to prepare their
income statements so that overall account can be managed (Chandra, 2011.). Apis Ltd has total
fixed production is £200 and they have total gross profits is £9800. On the basis of this they will
be able to assess their financial growth so that they will be able to achieve success in the market.
Cost volume profit technique: On the basis of this approach, Apis ltd can determine
their overall cost so that they can identify their profitability level. This will be beneficial for the
hospitality industry as through this they will be able to enhance their performance.
D2
Organisations are performing their operations in the business environment so that their
growth can be improved. Here, Apis Ltd can use some methods and techniques in order to
calculate their financial data. Through this, the overall expenses can be identified so that they can

achieve success in the market (Schaltegger and Burritt, 2010). As per the marginal costing
technique the net profit is 7500. so, through this, they will be able to make an effective strategy.
TASK 3
P4. Advantages and disadvantages of budgetary control planning tools:
Budgetary control can be defined as how well superiors or managers can make utilisation of
budget so as to monitor or control operations and cost in the specific accounting time (Renz,
2016). In Apis Ltd., it is the process for managers to fix performance and financial goals with
budgets and then compare the actual results with desired results and adjust performance
accordingly as needed. Budget is the formal statements of the financial resources that is used to
carry out specific activities in a specific time. Budgetary control is the technique where actual
results are compared with budget.
Budget is essential for the planning of financial resources in the company. There are various
planning tools for the budgetary control: Operational Budget: It is concerned with expenses and revenues of operating activities.
Profit from sells is revenue and the expenses which are there in process are expenses on
operating. Master Budget: It is the comprehensive projection that explains in which way company
wants to carry out its operations in period of budget. Income statement, cash budget give
supports to master budget (Lukka, 2010) Financial Budget: It provides a detailed view on how to manage funds and from where
the funds will be collected. It provides revenue information and return from capital
expenditure. Static Budget: Budget of static contains those elements which are not modified according
to sales. Overhead cost shows a static budget type. These kinds of budgets are used by the
non-profit organisations and SME's .
 Cash flow Budget: It is prepared to manage flow of cash during the business operations.
Cash flow budget is being prepared by accounting officers to get useful information
regarding shortfall in expenses and sales. With the help of it the movement of cash can be
monitored by the entity and can be used in useful projects (Zadek, Evans and Pruzan,
2013)

Advantages and disadvantages of budgetary control planning tools are:
Advantages Disadvantages
 Planning tools help in coordination
among various departments of Apis
Ltd., so that they can work accordingly
and can get satisfactory results. It helps
employees to communicate important
facts with each other that will affect
operations of mentioned entity
(Easterby-Smith, Thorpe and Jackson,
2012).
 Planning tools help in allocation of
resources, so it is possible that there
will be improper or less efficient
allocation, because of which there may
be disputes among several departments.
 Planning tools helps managers in
strategy preparation which may be
related to operations in future, because
of it plans can be made and those plans
can be implemented later on.
 Planning tools of budgetary control can
put a pressure on the employees of Apis
Ltd., as the targets will get created and
it became difficult to achieve those
targets.
 With the help of budgetary control
planning tools, a system is made by
company through which various
responsibilities of employees can be
made addressed.
 High cost of estimation can be made by
the managers of the company while
preparing budget (Lukka, 2010)
 It helps in appraisal of workers and
employees of the mentioned entity.
Planning tools helps in the comparing
planned performance with desired
performance.
 If there will be improper achievement
of targets because of planning tools
than it may cause conflicts among
several departments and that will be a
disadvantage for an organisation.
 Planning tools helps the accounting
officers for taking quick decisions if
there will be any difference in the

budget (Myers, 2013)
 It helps in employee involvement in the
organisation while preparation of
budget, because it increases employee
morale and reliability and it will be
helpful for entity in growth.
M3
Various planning tools of budgetary control can be used for preparation and forecasting
of budgets in Apis Ltd., They will help entity in making successful budget related to different
departments and organisation. Operational budget helps in managing current expenses and also
in projection of future expenses. It contributes in reserve building and accountability. Master
budget is the budget for utilities and material, help in liquidity control, in maintaining expenses
and revenue budget and also in giving sales, capital expenditure and production budget.
Financial and cash flow budget helps in maintaining financial resource of the entity and in
maintaining flow of cash.
D3
In Apis Ltd., budgetary control planning tools help in solving various financial problems
so as to lead organisation to success and growth. One of the planning tool of budgetary control is
financial budget, through which financial problems of the organisation can be solved. In
mentioned entity financial budget will help to make sure that the money is there to spent when
there is time to spent. It charts expenses and income of the entity. A financial plan should contain
both current and expected expenses and should be in a proper detail to solve problems of the
cited entity.
P5. Comparison between how organisation could use management accounting so as to respond to
problems related to finance
Management accounting is the provision of data of finance and also a advice to company
for the business development and organisation's use. It helps in making decisions, devising plans
and management of performance. Management accounting helps in providing various tools
which can help Apis Ltd., and its administration to solve various problems that can affect entity

in the management of its day to day operations (Kabir, 2011), there are number of techniques
related to management accounting which can be used by the officers of management accounting
in Apis Ltd. It has been analysed that how management accounting techniques which are based
on cost accounting, financial accounting and according to the basis of projects of future that are
used by administration of entity and it has been compared with the techniques of management
accounting by Arora Holdings Ltd. There are certain tools and techniques which have been used
to deal with the financial problems in management accounting.
 Benchmarks: It is conveniently utilized when an association trusts that other outside
associations have top notch learning about procedures, application, nature of costing
techniques utilized by organization. These are past Organization's available state of
workmanship. It speaks to different accept of bookkeeping framework that are set by
organization before execution of any sort of money related arrangement. Under this
fundamental norm have been set by organization to conquer money related issues those
are emerging in organization.
 Performance indicator(PI): These are utilized to demonstrate authoritative achievement or
advance with connection to monetary issues. The significant motivation behind this is to
screen advance toward achievement key objectives. It is sorted into two sections
monetary and non-money related.
 Budgetary targets and control: With the help of pre-set budgetary targets and close
monitoring, the cited company could deal with financial problems of the organisation. Financial governance: Financial governance assist the cited firm to deal with the financial
problems of the organisation. This guide the firm to have proper manner in the firm in
terms of financial matters.1. Analysis of variance in cost: Variances are basically said as the difference in real and
planned figures. Differences can either be positive or negative but they can be managed.
Difference which is negative shows that the entity is unable to achieve planned figures
which simply means that their growth is not proper (Shouhua and Chunhua, 2012). Apis
Ltd and Arora Holdings Ltd both are using difference analysis or variance analysis, and
with its help they face negative differences.
2. Marginal costing: Number of problems which are in relation with cost can be solved by
applying concepts of techniques of marginal costing. Officers of accounting of Arora

Holdings Ltd., and Apis Ltd use such method of analysing profit which comes in
marginal costing.
 On Future Information basis: Arora Holdings Ltd and Apis Ltd can use different
management accounting techniques as it is a very normal problem for any entity as many
problems are being faced by entity which related to problems of future. Mentioned entity
will discover number of features which may impact project of future and apart from it
they will also find out returns that can be achieved from activities that will carry out in
future (Laux, 2011). There are several techniques which can be used by Apis Ltd and
Arora Holdings Ltd for the maintenance of future assignments. These techniques can be
like budgeting and budgets and control on budgetary.
M4
Response to the financial problems, management accounting can help Apis Ltd to
achieve success. Financial management can help in assessment of financial resources that are
needed by the company in achieving growth. Management accounting helps in identifying social
and environment factors that will impact ability of company to create time value. Solution to
financial problem helps in giving reports that include impacts of sustainability data so as to
perform pricing and budgeting decisions, appraisals of investment and strategic planning.
Management accounting helps in developing report that integrate issues of sustainability so as to
make sure financial and non-financial information is not disclosed.
CONCLUSION
From the above mentioned report it has been concluded that management accounting
plays an important role in implementing the strategies. Manager can use some of the techniques
such as forecasting, budgeting in order to manage their overall financial information. In order to
analyse the net profit of the industry, the account manager can use absorption and marginal cost
technique. The firm can use planning and budgeting tool so that their overall performance can be
improved in an efficient manner. Further, Apis Ltds Can use management accounting in order to
resolve their issues so that their overall performance can be improved.

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[accessed on 12th april 2017].
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