Management Accounting: Systems, Reports, Cash Budget, Planning Tools

This report covers the essential requirements, systems, and approaches of management accounting in an organization. It discusses management accounting systems, reports, cash budget, and planning tools for managing financial problems.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...............................................................................................................3
Scenario.............................................................................................................................3
a) Management accounting (MA) systems and its benefits..........................................3
b) Management accounting reports...............................................................................5
c) Cash budget for the next 6 months ending August 2020..........................................6
d) Planning tools for managing the financial problems of the organization..................7
e) MA system that can be adopted to respond to the financial problems...................10
f) Critically evaluating the financial position of Lets Grow Ltd as per the forecasted
cash budget.................................................................................................................12
CONCLUSION.................................................................................................................12
REFERENCES............................................................................................................................13

INTRODUCTION
Management accounting is the process through which the financial information
pertaining to the business collected by the management which helps it in better and
improved decision making with respect to the future success of the business. It is
different from the financial management as it takes into consideration both quantitative
and qualitative information. This report covers about the essential requirements,
systems and approaches of management accounting in an organization.
Scenario
a) Management accounting (MA) systems and its benefits
The management accounting system helps the business organization in dealing
with different types of business problems and makes the process much easier to
manage. The different types of management accounting system are stated below.
Cost accounting system
This system is used by the organization with the purpose to effectively manage
the cost in relation to the products in terms of profitability and cost control. It helps in
analysing the cost of each and every product that is being produced by the organization
(Khan, Parvin and Sayeeda, 2019). It analyses the cost of production in respect to
variable and the fixed cost at every step of the production. The essential requirement of
it is to conduct cost and profitability analysis for each of the product and effective way.
Benefits
 Cost accounting system helps in reviewing the raw material under each stage of
production.
 It provides assistance in lowering the cost of production which leads to lowering
the operational cost by identifying the exercising control over the activities or
task. Thus, leads to profit maximization. It's real time aspect of it helps the management in taking informed and quick
decisions without waiting for the reports.
Application
The cost accounting system will help Lets Grow Ltd in effectively managing its
material usage as and when it undergoes various production process and the cost
incurring at each level.

Inventory management system
The inventory management system is the system which is being used by the
organization for the purpose of effectively monitoring and managing the stock of the
materials and finished goods (Swafford Jr and et.al, 2017). It assists in tracking the
movement of the goods from one process to another and also timely delivering the
same to the clients. It optimizes the entire supply chain process. It involves raw
material, work in process and the finished goods. It is essential for effectively managing
the inventory of the organization.
Benefits
 This system helps in reducing the amount of inaccuracy when the entries were
made manually and also helps in avoiding the duplicity of the data.
 It is an automated process which helps in effectively recording and tracking the
processes which leads to no errors. It also helps in enhancing the productivity as the instant report can be prepared
as per the requirement so that changes can be made in a timely manner.
Application
The implementation of inventory management system in Lets Grow Ltd will
provide assistance in managing its inventory which will lead to reduction in the inventory
management cost.
Job costing system
Under this, a complete set of information is collected in respect to the cost with
different jobs undertaken. It is useful in providing cost report to the customer based on
the specification given by them. It determines the cost pertaining to the customers order
(Bottomley and Bosman, 2018). The product is manufactured as per the needs and the
requirements of the customer and a separate cost sheet is prepared. It is essential for
determining the cost associated with the different expenses charged in concern to the
job.
Benefits
 It provides assistance in determining the profits for each job separately.
 It provides complete information with respect to the material, labour and the
overhead expenses incurred for each job.

 This system helps the organization in identifying any defect or spoilage in the
specific job so that responsibility can be fixed on the individuals.
Application
This system will assist Lets Grow Ltd in determining the any defect in the
production system in accordance with the job carried out.
Price optimization system
This management accounting system is a strategy which is being used by the
organization for the purpose of determining the price of the product (Alaeddin and
Thabet, 2018). It is based on the demand and supply of the product in the market along
with the factors such as taste and preferences of the customers. It helps in knowing
how much the customer is willing to pay for the particular product. This system is
essential in determining the price of the product.
Benefits
 This system assists the organization in focussing on the key areas which
includes sales margin, conversion rate etc. the revenue generated through it
adds to business growth and expansion.
 It reduces the manual work which leads to minimizing the probability of human
errors. The decisions made through this system is more precise and has a huge impact
on the business.
Application
The application of this system in Lets Grow Ltd will help in determining the right
price for its products.
b) Management accounting reports
There are various types of reports which is being used by the organization for the
purpose of decision making. A detailed description is given below.
Account receivable aging report
This report is very important for the business organization which is provides
goods to its customers on credit basis on a large basis (H Roy Austin, 2019). It provides
a complete detail about each and every customer along with the total amount due from
them and the credit period provided. It also helps the business organization in

identifying any bad debts so that provision can be created for the same for avoiding the
future problems.
Performance report
This report is prepared in respect to each department and each employee of the
organization which is based on the performance. These reports are useful in making
crucial business decisions (Maas and Verdoorn, 2017). The employees who are under
performing are mostly let go and the employees who perform well and achieve targets
or the set goals are rewarded. It is also useful in identifying any flaw in the workflow
system. This report provides assistance to the organization in order to remain on track.
Cost managerial accounting reports
This reports provide information about the cost incurred in manufacturing a
particular product. It takes into account all the costs such as overhead, labour and so
forth, which is then divided into the number of produced manufactured. It provides
bifurcation between the cost of products and selling price of the managers (What is
Managerial Accounting? 2020). It helps in exercising cost control activities after
analysing the expenses. Thus, this report provides exact details about the cost that the
organization is incurring so that a complete cost analysis process can be carried out.
Therefore, this report is very important from the business point of view mainly for the
manufacturing organization.
c) Cash budget for the next 6 months ending August 2020
Cash budget
Particulars March April May June July August
Sales (in the same month) 30000 36000 24000 28000 32000 34000
Sales (Received in the
following month) 96000 120000 144000 96000 112000 128000
Total sales 126000 156000 168000 124000 144000 162000
Purchases 50000 50000 70000 80000 90000 100000
Wages 30000 30000 30000 30000 30000 30000
Rent 12000 12000
Depreciation 2000 2000 2000 2000 2000 2000

Variable overheads 10000 15000 18000 12000 14000 16000
Fixed overheads 30000 30000 30000 30000 30000 30000
Total expenses 134000 127000 150000 166000 166000 178000
Cash surplus/Deficit -8000 29000 18000 -42000 -22000 -16000
Opening cash balance 20000 12000 41000 59000 17000 -5000
Closing cash balance 12000 41000 59000 17000 -5000 -21000
d) Planning tools for managing the financial problems of the organization
There are different types of planning tools which can be utilized by the
organization for the purpose of facing and the financial problems that may come across.
The various forms of planning tools are stated below.
Cash budget
The cash budget is useful in determining the cash input and output of the
organization in a specific period. It is mainly used for determining whether the company
is having sufficient amount of cash in order to carry out its day to day business activities
(Mariana, 2018). It is also used in determining whether the huge and unnecessary
amount is being spent on the unproductive manner which is not beneficial for the
business organization. By preparing cash budget, the company provides a complete
summary of the anticipated revenue and expenditure.
Advantages Disadvantages
 This budget assists the organization
in avoiding the situation of taking
additional debt. It means that in
case the company is having less
cash which indicates that the
company should set aside the
remaining cash in order to meet the
emergency situations.
 This budget helps in finding the
other sources of which can help in
meeting the financial deficiency. It
 Cash is considered as the easiest
asset to steal and in case where
most of the transactions re done on
cash basis then it becomes very
essential to maintain the proper
documentation of it because it is not
easy to trace the cost pertaining to
the items involved.
 While using this budget, the non-
financial aspects are completely
ignored. For instance, one bank

also helps in exercising control over
overspending of the cash and helps
in finding new and better ways to
grow (Reichard and Van Helden,
2016).
 It assists in identifying if there is any
deficit in the cash requirement or
might arise in future so that
potential and significant steps can
be taken in order to avoid any such
problems.
 It helps in depicting the current
state and financial health of the
organization as anyone with the
basis knowledge can understand
the cash inflows and outflows and
identify the current and the future
issues that might arise.
offers loan at the lower rate of
interest which can be recorded in
the cash budget while the another
bank offers excellent customer
services cannot be recorded.
 The cash budget can be easily
manipulated by the managers to
depict good with the objective to
gain benefit from it.
 Once the budget is prepared and
reported to the management, the
numbers cannot be changed later
on. This makes this budget rigid as
it lacks the flexibility to make
changes.
Flexible budget
These are the budgets which is being prepared for the business purpose and can
be easily adjusted as per the requirement which can be in terms of volume or the level
of activity. It is considered to be the more sophisticated budget. The pros and cons of
this budget is stated below.
Advantages Disadvantages
 It is mainly useful for businesses
where the cost is closely related to
the level of activity. For example, in
manufacturing industry, the
estimation of overhead expenses
 Even though it is a good tool but it
is difficult to formulate and
administer it. One issue of
formulation is that not all the cost
are fully variable instead some have

can be segregated and considered
as fixed cost (Maher, Fakhar and
Karimi, 2018).
 This budget restructures of adjusts
itself with respect to the level of
activity and also it can be
considered as a better tool for
evaluating the performance of the
managers.
 The main advantage of using this
budget is that it can be easily
updated and adjusted as per the
needs and requirements of the
business.
fixed component as well which are
required to be included in the
budget separately which requires a
lot of time and efforts (Ozyurek and
Uluturk, 2016).
 In this budget, there can be no
comparison between the actual and
budgeted revenues as both are
same. This method is mainly used
for comparing the actual and
budgeted expenses. It doesn't
highlight whether the actual
revenue is below or above the
budgeted.
Capital budget
Capital budget states about the capital receipts and payments of the
organization. The capital receipts include disinvestment, borrowing, loans from the
public while the capital expenditure involves development of machinery and other
facilities.
Advantages Disadvantages
 This helps the company in
understanding the different risks in
association with the capital
investment along with the effect of it
on the return of the organization
(Malenko, 2019).
 This budget helps in taking strategic
business decisions with respect to
the long term capital investments.
 It is mainly for the long term
business decisions and are mainly
irreversible in nature. Thus, it
cannot be used for evaluating the
short term investment proposals.
 In case of any slight variation in the
budgeting will lead to the wrong
decision-making which may lead to
incur losses for the organization

 It assists in taking informed
business decisions with respect to
the capital investment and it takes
into consideration all the possible
alternative options.
(Webb, 2016).
 It is prepared based on certain
assumption, therefore, it does not
guarantee any success with respect
to the future benefits.
e) MA system that can be adopted to respond to the financial problems
The different types of ways through which the organization can respond to the
financial problems it might face. These problems can be tackled in different way which
varies from one organization to another. A detailed description is given below.
Benchmarking: It is the process which is being utilized by the business entity in
order to measure the success of the business against the company within the same
industry. It helps in determining the gap in respect to the performance, processes so
that timely and corrective actions can be taken to improve it. Under this, the company
taken for the purpose of comparison is best in class. Benchmarking will help Lets Grow
Ltd in increasing its efficiency and performance in the industry (Gillen, 2017). A
complete competitive analysis is carried out which helps in determining the weaknesses
of the organization as against the competitors. It also helps the business organization in
gaining competitive advantage over its competitors. Benchmarking works on continuous
improvement because the main aim of it is to improve and enhance the performance of
the business organization. The parameters used by the organization for doing
comparison is of immense importance. The company is required to identify the areas
which are required to be focussed on in evaluating the performance and take effective
business decisions.
Key performance indicators: The KPIs is the performance metrics that
demonstrate how the organization is accomplishing the business objectives. The KPIs
can be financial and non-financial and are used at the multiple levels of the
organizations. This is used in evaluating the success based on the target achieved. The
high KPIs is mainly focussed on the overall growth and performance of the business
and on the other hand, the low level KPIs are aimed at the processes of the various
functional departments of the organization (Aziza, Suwignyo and Makki, 2019). It is

used in evaluating the performance and efficiency level of the employees based on the
targets and the goals achieved. In terms of financial KPIs it includes net profit and gross
profit margin, sales and so forth. In contrast to this, the non-financial aspects includes
measuring the foot steps in the store, number of repetitive customers, customer
experience and satisfaction level etc. it can be clearly understood with the help of an
example, a software company is trying hard to achieve the fastest growth in the industry
by taking into consideration the year on year revenue growth which can be the main
performance indicator of the company. Thus, key performance indicator plays an
important role in effectively evaluating the performance of the company based on the
set targets.
Balanced scorecard: It is the framework which is used for implementing and
managing the strategies. It connects the business vision with the aims, objectives and
measures. It is mainly the business management tool. This metrics is used for
measuring the performance and then providing proper and appropriate feedback. The
collection of data is the crucial part in this, as it provides quantitative outcomes which
the managers and other personnel uses and interprets in order to make effective and
better business decisions (Hansen and Schaltegger, 2016). The balanced scorecard
reinforces good behaviour in the organization by focussing on the four separate areas
which includes learning and development, finance perspective, customers and the
business processes. These four areas encompass the vision and the business strategy
of the organization and it requires the active management for analysing the data
gathered. The balanced scorecard provides the complete information about the
organization as a whole with respect to the business objectives. It can also be used in
formulating and implement the strategy mapping for knowing at which part the value
addition is more.
Variance analysis: It is the tool which is used for analysing the variance in
between the actual outcome and standard outcomes. The complete sum of the
variances helps in determining the overall performance of the business in terms of over
performance or under performance. For each and every item, the company carries out
the variance analysis in order to know the favourability by comparing it with the set
standards (Landy, Zedeck and Cleveland, 2017). For instance, the actual cost is less

than the standard cost in terms of material used will result into favourable price
variance, in other words, it is cost saving for the organization. In another situation like, if
the standard quantity was 10000 pieces of raw input and 15000 pieces of input was
required in the production process, this would mean an unfavourable quantity variance
since more input was being used as compared to the anticipated one. On determining
the variance, the corrective actions are being taken by the management in identifying
the causes for the deviation and remedial steps that can be taken in order to reduce it.
f) Critically evaluating the financial position of Lets Grow Ltd as per the forecasted cash
budget
Based on the foretasted cash budget of Lets Grow Ltd, it can be interpreted that
the there has been a drastic change in these 6 months. In March, April and May, the
company was having cash surplus and in the last three months it was negative, that
means the company was having deficit cash. It can be seen that there is an increase in
the payment for purchases made by the company. In last two months, that is, July and
August, the closing cash balance becomes negative which is -5000 and -21000
respectively. Thus, it can be said that Lets Grow Ltd is not effective enough in managing
its cash requirements and this cause the problem of cash crunch in the organization as
the company might not be able to carry out its business activities in effective way. Also,
there are chances that the company might be required to procure additional funds for
smoothing running its daily business activities. Thus, currently the position of the
company is not good.
CONCLUSION
It can be summed up from the above that management accounting (MA) is very
useful for the business organization in order to meet the business requirements. There
are various management accounting system that can be implemented by the
organization which meet its operation requirements. The MA systems that can be used
are cost accounting, inventory management, job costing and so forth. Each of these
systems has their own benefits. The different reports that are being prepared under
management accounting will provide valuable information to the business which assist
in taking better and improved business decisions. The cash budget is very useful for the
business organization in terms of analysing the liquidity position of the business and is

used for preparing another budgets as well along with forecasting the financial
statements. The planning tools such as cash budget, flexible budget and capital budget
can be used by the organization in overcoming the challenges that they might face.
Thus, management accounting is very essential for ensuring success.

REFERENCES
Books and Journals
Alaeddin, O. and Thabet, A., 2018. Management Accounting System and Credit Risk
Management Policies and Practices towards Organizational Performance in
Palestinian Commercial Banks.
Aziza, N., Suwignyo, P. and Makki, A., 2019. Performance Measurement using the
Integrated Performance Measurement System Approach. Jurnal Teknik
Industri. 20(1). pp.73-84.
Bottomley, B. and Bosman, R., 2018. Job costing: An analysis of the construction
industry.
Gillen, D., 2017. Benchmarking and performance measurement: the role in quality
management. AM Brewer, KJ Button, & DA Henshe, Handbook of Logistics
and Supply-Chain Management (Handbooks in Transport, Volume 2).
pp.325-338.
H Roy Austin CMA, C. P. A., 2019. COLLECTING RECEIVABLES. Strategic
Finance. 101(4). pp.19-20.
Hansen, E. G. and Schaltegger, S., 2016. The sustainability balanced scorecard: A
systematic review of architectures. Journal of Business Ethics. 133(2).
pp.193-221.
Khan, I., Parvin, N. and Sayeeda, N., 2019. Cost Accounting Practices in Bangladesh: A
Study of the Pharmaceutical Sector.
Landy, F., Zedeck, S. and Cleveland, J., 2017. Performance measurement and theory.
Routledge.
Maas, V. S. and Verdoorn, N., 2017. The effects of performance report layout on
managers’ subjective evaluation judgments. Accounting and Business
Research. 47(7). pp.731-751.
Maher, M. H., Fakhar, M. S. and Karimi, Z., 2018. The relationship between budget
emphasis, budget planning models and performance. Journal of Health
Management & Informatics. 5(1). pp.16-20.
Malenko, A., 2019. Optimal dynamic capital budgeting. The Review of Economic
Studies. 86(4). pp.1747-1778.
Mariana, Z., 2018. THE CASH BUDGET–A SHORT-TERM FORECAST TOOL FOR
THE FINANCIAL STATEMENTS OF ECONOMIC ENTITIES. Ecoforum
Journal. 7(2).
Online
Ozyurek, H. and Uluturk, Y., 2016. Flexible budgeting under time-driven activity based
cost as a tool in management accounting: Application in educational
institution. Journal of Administrative and Business Studies. 2(2). pp.64-70.
Reichard, C. and Van Helden, J., 2016. Why cash-based budgeting still prevails in an
era of accrual-based reporting in the public sector. Accounting Finance &
Governance Review. 23(1-2). pp.43-65.
Swafford Jr and et.al, 2017. System for inventory management. U.S. Patent 9,805,539.
Webb, A., 2016. Budget Management. In Handbook of Intensive care: Organization and
Management (pp. 339-357).

What is Managerial Accounting? 2020. [Online]. Available
Through:<https://www.freshbooks.com/hub/accounting/managerial-
accounting-helps-managers>.