The Importance of Management Accounting

This assignment delves into the crucial role of management accounting in modern businesses. It analyzes different costing methods, such as absorption costing, and highlights their importance in determining profitability. Furthermore, it emphasizes the value of budgeting in addressing organizational challenges and fostering goodwill. The assignment underscores the significance of appropriate costing methods and budgets for achieving net profit and overall business success.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Meaning of management accounting and its essential requirements...............................1
P2: Various types of reporting method...................................................................................3
M1: Analyse benefits of using accounting system.................................................................4
D1: Critical analysis of reporting system...............................................................................4
TASK 2............................................................................................................................................5
P3: Costing method use to calculate net profitability for the company.................................5
M2: Analysis of using management accounting techniques..................................................8
D2: Critical evaluation of collected data in income statements.............................................8
TASK 3............................................................................................................................................8
P4: Merits and demerits of using budgets..............................................................................8
M3: Analysis of various planning tools................................................................................10
D3: Critical evaluation of financial issues............................................................................10
TASK 4..........................................................................................................................................10
P5: Balance scorecard approach...........................................................................................10
M4: Analysis of financial problems.....................................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Account is a systematic study of financial transactions that are being use for the purpose of
evaluating overall impacts of an organisation. The information that is collected by the company
is needed to be record, summarise, evaluate and control its related implication before posting it
into their respective format. Management is held responsible for providing necessary information
and support to account officers to regulate their operations in more effective manner. The main
motive of an organisation is to attain future aims and objectives through using reliable data about
the company.
This particular project is all about explaining necessary information about accounting
system and reporting methods. While some costing methods are utilised for the purpose of
evaluating net profit for the company. Further, this report is analysing merits and demerits of
using planning tools that are essential of budget controlling are discussed under this report. In
accordance with this, all financial problems that are present in an organisation are analyse and
measures is being use to overcomes them are explain in this report (Zoni, Dossi and Morelli,
2012).
TASK 1
P1: Meaning of management accounting and its essential requirements
Nowadays, it has been seen that recording of financial data in utmost important aspects for
an organisation. This will assist in managers to make use of appropriate accounting data into
their respective format as per their date of occurrence. The main motive behind doing so is to
reduce extra costs and expenses that are being done during an accounting period of time. Every
data collected from different sources are having valuable consideration during preparation of
essential statements (Van der Stede, 2015). The primary aim of an organisation is to attain sort
and long term aims and objectives that are crucial for the company. All data collected would be
analyse and regulated in appropriate manner before presenting it in front of various outside
stakeholders and investors.
Comparison
Management accounting Financial accounting
This is responsible for making valuable rules
and regulations in order to prepare financial
While in this particular accounting, accountant
need to make use of policies and rules in
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reports in appropriate manner. formulation of specific reports.
The data presented in front of management is
based on historical cost that is mainly use for
the purpose of planning in their future
operations.
These are associated with all activities those
are based on past data.
It is not use to evaluate financial and
operations performances of an Tech UK.
This is related with only financial data for the
cited company.
Importance of using types of management accounting systems:
It has been determine that accounting systems are more reliable and appropriate techniques
by which all information can be recorded into their respective format in more effective and
accurate manner. The manager can easily be able to take some crucial decision regarding their
future growth and stability by the help of management accounting systems (Tessier and Otley,
2012). The performance of the company can also be enhancing by using right kind of techniques
in their daily course of actions. It is used to measure all necessary tools and methods for an
organisation through comparing past performance with the current one.
Types of accounting system:
Cost accounting system: It happens to be primary accounting components of
management. They uses this as more reliable system in order to record, summarise and determine
best accurate alternative should be helpful for Tech UK in their regular operations. In this they
need to consider some crucial costs such as:
 Standard costing: It is known as basic costing method which a company wants to
estimate to attain during the period of time. This particular cost would be atleast incur at
the time of production of products.
 Actual costing: It is said to be one of the essential costing method which is actually
occurs in accordance to produce certain kind of products.
 Normal costing: According to this particular costing, this much cost will be incur after
cutting down all costs or expenses.
Inventory management system: It is one of the most effective costing systems which can be
use by managers in order to control and regulate their position of inventory during an accounting
period of time. There are various techniques by which inventory can be managed such as:
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LIFO: It is a kind of cost flow assumption which should be used by UK companies in moving
the costs of goods from stock to the prices of products sold. In this the latest and more recent
product purchased are first costs expenditure can be recorded in this system.
FIFO: It is a kind of assets management and valuation techniques in which total assets produce
can be acquire to be sold initially (Lim, 2011).
AVCO: This method is more simple stock evaluation techniques to examine the value of ending
stock and costs of sales on regular basis of average units present for the purpose of sale.
Job costing system: According to this process of assigning the costs which is being incurred
to a particular job and individual and company is associated with. It consists of certain methods
such as:
Batch costing: It is a kind or particular order costing which is much similar to job costing.
With this each batch are number as identical units so that they look identical from one another
(Lavia López and Hiebl, 2014).
 Process costing: This seems to be an effective costing methods uses as units of
production in companies those are associated with producing large amount of
homogeneous products.
P2: Various types of reporting method
In every business organisation, they are always aims to product more reliable results by the
help of using appropriate financial data during an accounting period of time. It is essential for an
organisation to make use of reporting methods for the purpose of preparing valuable reports for
the company. The main motive behind formulating this kind of report is to control cost and extra
wastages that are seen in measuring performance of an organisation. On the basis of this report,
investors would be able to make valuable decision regarding their capital investments in
upcoming projects. Some methods are discussed underneath:
Performance report: According to this particular reporting method company would be
able to make comparison of actual performance to with the standard one. This will assist Tech
UK company to determine their current position in terms of finance (Klychova and et. al., 2015).
Account receivable report: This particular method is useful to determine total list of
unpaid customer invoices those are remain outstanding during the period of time. By the help of
this, company can easily be able to analyse total time to collect recovery of payment from
debtors.
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Inventory management report: This reporting technique is uses to analyse overall
opening and closing stock position that is being kept by the company during the time. It is
considered as primary report on the basis of which current position as well level of inventory can
easily be determine by the company.
Job cost report: On the basis of this particular report, company is would be able to
analyse total cost and expense a company is being investing in production of one unit of products
from the available resources.
Importance of using reporting method:
It is an effective decision to be made by the managers to make use appropriate reporting
method that can assists an organisation to analyse their total financial position during the
financial year. All the above mentioned reports are having their own benefits and limitation.
Some of them are, performance report is used to compare to actual and past position of Tech UK.
While account receivable report will be essential to make identification of total time to get
outstanding balance from debtors. All of them are uses by the investors and other stakeholders to
collect more specific data from prepared reports (Klemstine and Maher, 2014).
M1: Analyse benefits of using accounting system
In accordance to analyse the performance of Tech UK, specific accounting systems are can
be leads to be used by the managers of that company. It is the capacity of an organisation to
present financial image more clearly to investors and their potential stakeholders. Cost
accounting systems can be more reliable and accurate system that can assist managers to analyse
total cost incur in production process. While inventory management system is use to evaluate
total inventory kept by the company with them.
D1: Critical analysis of reporting system
In respect to attaining more positive outcomes for the company, the managers need to
make use of proper reporting method during the evaluation process. This will help an
organisation to analyse their current position in front of investors. Some of method such as
performance report is use to evaluate actual stage with the standard one. While account
receivable report can make company an ideas about their total recovery period to collect their
outstanding balances.
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TASK 2
P3: Costing method use to calculate net profitability for the company
Cost is an important tool for an organisation; they can use this to produce products and
services for the purpose of increasing overall growth and sustainability in an accounting period
of time. These costs are direct or indirectly associated with the manufacturing process. There are
various types of costs that can be uses by the managers while making future decision for
increasing goodwill for the company. Some of them are discussed underneath:
Absorption costing: This type of costing techniques is more reliable for evaluating
performance of an organisation (Absorption costing, 2018). In this, all costs are applicable to the
production process. It consists of both variable and fixed costs at the same point of time. Because
of this it is known as full costing methods. It does not be taken as more reliable costing methods
for the purpose of making future decision.
Marginal costing: According to this particular costing a method which is used by an
organisation in the production of one additional products unit. It use to taken into account only
variable costs and fixed costs are not consider while calculating contribution per units. Because
of this, it is said to be period cost. It is more effective and reliable for making future decision
making (JOSHI and et. al., 2011).
Income statement as on September by using Marginal costing method:
Working 1: Calculate variable production cost £
Direct material cost 8
Direct labour cost 5
Variable production O/h 2
Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
Nil 2000*15 = 30000 500*15 = 7500
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Net profit using marginal costing ￡Amount £ Amount
Sales value
Less: Variable costs
Stock at the begining
Cost of production
Stock at the closing
Variable sales overheads
Contribution
Less: Fixed costs:
Fixed Production overheads
Fixed Selling overheads
NIL
30000
(7500)
15000
10000
52500
(22500)
(7875)
22125
(25000)
Net loss -2875
Income statement on the basis of Absorption costing method
Selling Price per unit ￡35
Unit costs
Direct materials cost ￡8
Direct Labour cost ￡5
Variable Production overhead ￡2
Variable sales overhead ￡5.25
Budgeted production during the year is 3000
units
Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000
Selling cost: In this budgeted cost is £10,000and Actual cost is £7875
Absorption costing working notes
Working Note 1: Calculate full production cost
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Direct material ￡8
Direct labour ￡5
Variable cost ￡2
Fixed cost ￡5
Total ￡20
Working Note 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 2,000*20 = £40,000 500*20 = £10,000
Working Note 3: under/ over absorbed fixed production overhead
Actual fixed production: ￡15000
Fixed overhead: ￡10000
Total £5000 (under absorbed)
Net profit using absorption costings ￡Amount £Amount
Sales value
Less: Cost of Sales:
Opening stock
Cost of production
Closing stock
(Under)/Over absorbed fixed prod. O/h
Gross Profit
Less: Selling Expenses
Variable sales expenditure
Fixed selling expenditure
NIL
40000
(10000)
7875
10000
52500
(30000)
(5000)
17500
17875
Net loss -375
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M2: Analysis of using management accounting techniques
It is the company who make decision in respects to use of management accounting tools
and techniques that are beneficial in near future time. There are various accounting techniques
which are more reliable to control the performance of an organisation. Such as standard costing
is the appropriate techniques which can assist project managers to use the cost in effective
manner.
D2: Critical evaluation of collected data in income statements
On the basis of above calculation, it has been seen that there is negative gains attain. The
company have two important option such as marginal and absorption costing. Results are varied
from both the methods. The difference is seen because of fixed cost treatments during the
computation of net profit.
TASK 3
P4: Merits and demerits of using budgets
In every business enterprises, planning is considered to be utmost important aspects. This
can be required to make evaluation of upcoming aims and objectives in more effective manner.
Because of this, Tech UK wants to use various kinds of budgets in their daily business
operations. Some of them are discussed underneath:
Financial budgets: It is known as one of the primary budget that is being prepared by the
accountant in order to analyse current performance and position of the company in comparison to
last year. This is prepared after the end of financial year.
Advantage: This will provide crucial information about all costs and expenses that a
company is investing in regular course of business operations (Brewer, Sorensen and Stout,
2014).
Disadvantage: It does not be control additional expenses or costs those are unpredicted
to the company. It is too costly to prepared budgets always.
Operation budgets: This seems to be an effective budget which will be prepared by an
organization in order to determine total expense a company in investing for the production of one
unit. It can be prepared on regular, weekly, quarterly and yearly basis.
Advantage: These budgets will be able to control performance of operational department
through using minimum costs during the time.
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Disadvantage: The main limitation of this budget is that, it is too time consuming or
need to make more than one reports such as sales, raw material and production budgets.
Process of budget:
 Estimation of budgets idea: It is necessary to make proper idea about requirement of
budget after that process of preparation can be started.
 Check availability of capital: The next objective is to make examination of various
sources from which funds can be collected.
 Develop budget package: It is vital for the managers to make proper package which is
affordable to the company (Bennett, Schaltegger and Zvezdov, 2013).
 Obtain revenue forecast: It happens to be earning predication from total sales done during
an accounting period of time.
 Collection of capital budget request: It is essential to make proper capital budget request
and transfer it to the upper level.
 Udate budget model: In this particular process, proper analysis of budget data in the form
of final budget is needed to take into account.
 Review of budget: It is last process in which collection of appropriate feedbacks from
employees to make order to prepare budgets for the company.
Pricing policy: There are various types of pricing policies needed to be taken into consideration.
Some of them are discussed underneath:
 Price skimming: It consist of setting up of cost in the beginning stage of a new products
which is more high as compare to other companies product.
 Cost based pricing: It is known as utmost important and simple tools through which a
product can be placed in more accurate manner. It consists of two major aspects such as
direct cost and marginal costing.
Importance of budget tools and objectives:
It is utmost important part for an organisation which is prepared for the purpose of
controlling all impacts those are going to be arises in coming future time. The main aims of using
all the above budgets are to control wastages and frauds that are occur in an organisation.
M3: Analysis of various planning tools
There are various tool and techniques which are helpful for an organisation to control their
budgets. Some of them are forecasting tools that is used to examine upcoming expenses and
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costs. While contiegency tools are used to analyse all the risks factors those are presented in an
organisation.
D3: Critical evaluation of financial issues
In every business, there are some types of financial problems are happen which can make
huge impacts on the growth and stability of the company. In order to reduce them, accountant
needs to make used of balance scorecard approaches to deal with them in more effective manner.
TASK 4
P5: Balance scorecard approach
According to the presented case study about TECH UK LTD which is currently established
in their financial statements for the accounting year that is showing total loss of 1.5 million. The
company wants to reduce all the impacts that are arise because of these particular problems. The
accountant has suggested making use of balance scorecard method to deal with all issues. It
consists of various perspectives. Such as:
Financial: It is an important prospective which is associated with organization financial position
and their effective utilisation of resource in evaluation of performance of the company.
Customers and other stakeholders: It is responsible for analysing organisation performance
from the customer’s point of views. The main motive is to create wealth and interest to
stakeholders (Amoako, 2013).
Internal process: According to this, the organisation operation is views from the quality and
efficiency associated to their products and services delivery by the company.
Organisational capacity: It is analyse through using proper evaluation of human capital,
infrastructure, technology, culture and other important aspects.
M4: Analysis of financial problems
In accordance to overcome all the issues those are presented in Tech UK Ltd, managers
would need to apply all vital financial tools those are effective enough to defeat in more quick
time. Some of them are Key performance indicators; financial governance and benchmarking are
correct option for the company.
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CONCLUSION
From this above project report, it has been concluded that management need to make use of
appropriate accounting and reporting systems that are more reliable to increase goodwill for the
company. Various types of costing methods are needed to be use for evaluation total net profit
during the time. With the help of appropriate budget company would be able deal with all kind of
issues those are making impacts in an organisation.
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REFERENCES
Books and Journals:
Zoni, L., Dossi, A. and Morelli, M., 2012. Management accounting system (MAS) change: field
evidence. Asia-Pacific Journal of Accounting & Economics. 19(1). pp.119-138.
Van der Stede, W. A., 2015. Management accounting: Where from, where now, where to?.
Journal of Management Accounting Research. 27(1). pp.171-176.
Tessier, S. and Otley, D., 2012. A conceptual development of Simons’ Levers of Control
framework. Management Accounting Research. 23(3). pp.171-185.
Lim, M., 2011. Full cost accounting in solid waste management: the gap in the literature on
newly industrialised countries. Journal of Applied Management Accounting Research.
9(1). p.21.
Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research, 27(1), pp.81-119.
Klychova, G.S and et. al., 2015. Management aspects of production cost accounting in horse
breeding. Asian Social Science. 11(11). p.308.
Klemstine, C. F. and Maher, M., 2014. Management Accounting Research (RLE Accounting): A
Review and Annotated Bibliography. Routledge.
JOSHI, P.L. and et. al., 2011. Diffusion of management accounting practices in gulf cooperation
council countries. Accounting Perspectives. 10(1). pp.23-53.
Brewer, P. C., Sorensen, J. E. and Stout, D. E., 2014. The future of accounting education:
Addressing the competency crisis. Strategic Finance. 96(2). pp.29-38.
Bennett, M.D., Schaltegger, S. and Zvezdov, D., 2013. Exploring corporate practices in
management accounting for sustainability (pp. 1-56). London: ICAEW.
Amoako, G.K., 2013. Accounting practices of SMEs: A case study of Kumasi Metropolis in
Ghana. International Journal of Business and Management. 8(24). p.73.
Online
Absorption costing. 2018.[Online]. Available through:
<http://www.businessdictionary.com/definition/absorption-costing.html>.
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