Definitions and References of Management Accounting System

MANAGEMENT ACCOUNTING INTRODUCTION 3 PART (A) 3 PART (B) 12 CONCLUSION 16 REFERENCES 16 INTRODUCTION Management accounting system is a systematic process which generates or provide useful information and data for management in order to assist them in decision making process. This report consist of management accounting definitions and its various aspects along with various type of management accounting systems, kind of management accounting reporting and different type of planning tools used by business organisation inducing their advantages and disadvantages in aspect of TPG Processing company

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION ..........................................................................................................................3
PART (A).........................................................................................................................................3
PART (B).......................................................................................................................................12
CONCLUSION .............................................................................................................................16
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting system is a systematic process which generates or provide
useful information and data for management in order to assist them in decision making process.
It is system which provide a framework for effectively formulation and implementation of
strategies and action plan. This report consist of management accounting definitions and its
various aspects along with various type of management accounting systems, kind of management
accounting reporting and different type of planning tools used by business organisation inducing
their advantages and disadvantages in aspect of TPG Processing company. The report also
provide an explanation about financial problems and in which manner management accounting,
in responding to financial problems, can drive organisations to sustainable success.
PART (A)
1 Explanation of management accounting.
MAS refers to set of activities which generates relevant information for managers. Such
information ultimately assist them in effective internal management (Sisaye, Birnberg, 2012).
Following are significant definition of management accounting system, as follows:
As per IMAs, “ Management accounting defined as field or area of profession that
involves contribution towards management and strategic decision making, effective planning,
professionalism in financial reporting and performance management” (Jakobsen, 2012).
Comment- According to the above definition of IMAs it is analysed that MAS is most
significant aspect of business enterprise's management. Managerial personnel can use this
process for effective decision making. In TPG processing company, management accounting
system is adopted by company to formulate action plan and strategies.
As per CIMA “ Management accounting system can be explained as a systematic set of
activities of choosing, collecting, assessing, and communicating financial or accounting
information to managerial personnels for effective decision making” (Gibassier, 2017).
Comment- According to the definition of CIMA, it is analysed that management
accounting system provides a systematic presentation of raw financial information to top
management for taking business.

Origin of management accounting- The origin of management accounting can be track in time
period of early industrial revolution. In addition, this accounting was evolved with help of cost
accounting techniques (Schaltegger and Zvezdov, 2015).
Principles of management accounting-
 Relevance- As per this principle of management accounting, the information included in
management accounting systems and reports should be reliable to business transactions.
 Influence- According to this principle, information of management accounting reports
should be communicated with all members of business.
 Value- The management accounting is linked with various kind of operations of
companies. Hence, information included in this system should be valuable.
 Credibility- As per this principle, the management accountant is expected to be ethical,
reliable and well aware of accounting concepts.
Roles of management accounting system:
 Provide detailed information- This is one of the important role of management
accounting that is related with providing detailed information including financials and
non financial information. Such as in the TPG processing company, their managers get
complete information related to financial and non financial transactions.
 Helpful in decision-making- Another role of management accounting is that it is linked
with the effective decision-making by providing various kind of reports. Like in above
company, they take better decisions by use of internal reports (Soltes, 2014).
 Enables better planning- The management accounting is useful for better planning and
strategy formulation. Same as in above company, their managers plans the strategies
effectively by help of MA reports.
 Helps in resolving financial issues- With help of management accounting systems,
companies get able to solve any kind of financial issue that occurs. Such as in above
company, their financial issues such as higher expenditure can be resolve by cost
accounting system.
 Improves organisational performance- In addition, the management accounting plays an
important role in context of managing financial and non financial performance. Like in

TPG processing company, their performance is being managed by help of various kind of
internal reports such as performance report.
 Linked with forecasting of income and expenditures- This is very important role of
management accounting that is associated with projection of income and expenditures by
help of planning tools. Same as in above company their managers forecast income and
expenditures by help of planning tools.
2. Types of management accounting system.
Management accounting systems: Below types of MAS are mentioned:
 Cost accounting system- It is a type of accounting system that is involved in the process
of estimating future cost of various activities as well as providing detailed information
about occurred cost in different operations (Adisetiawan and Surono, 2016). By
implementation of this accounting system, companies get able to know about each
activities' cost separately. It is essentially required in organisations by finance department
for tracking and keeping overall expenditures lower from standards. Like in the above
company, they are using this accounting system for keeping an additional control over
costs. In addition under Starbuck and Ikea company, they are using this accounting
system for tracking and estimating future cost of their operations. The starbuck company,
manage the cost of coffee manufacturing as well as the Ikea allocate the financial
resources in operations of furniture.
 Inventory management system- It has been defined as a kind of accounting system that
is linked with the tracking available quantity of raw material, prepared products, work in
process goods etc. The key role of this accounting system is to keeping cost of storage
lower as much as possible. Eventually, this system is essentially required for companies
in providing detailed information to production managers about quantitative aspect of
available material. Such as in Starbuck, their managers use this accounting system for
tracking the availability of material for coffee preparation and on the basis of it they
make order for purchasing. Same as in Ikea company, their production department
manage the stock of prepared furniture and raw material such as woods, fevicoal and
many more (About use of inventory management system in IKEA, 2019).

 Job costing system- This is an accounting system that is associated to the allocation of
cost separately to various kind of jobs. With the use of this costing system, companies
can compute each unit's cost and can take decisions further. The job costing system is
essentially required in those companies in which there are large number of products are
products different from each other (Hörisch, 2015). For example in Starbuck company,
they get able to calculate per unit cost of jobs involved in manufacturing of coffee. As
well as in Ikea company, their production department gets able to know about per unit
cost of manufactured furniture.
 Price optimisation system- It is a kind of accounting system that is associated with the
analysis of customer's behaviour on various prices so that an effective price of products
and services can be assigned by companies. This is widely used in most of companies in
which sales is lower. In addition, it is essentially required by organisations for setting the
prices at a level on which they can't bear any loss (Zheng and Alver, 2015). Such as in
starbuck company, they set the price of coffee on the basis of demand of customers and
their reaction on various pricing patterns (About use of price optimisation system in
Starbuck, 2019). Same as in the Ikea company, they evaluate demand of their products in
market and as per it set the prices on basis of it.
3. Different method of management accounting reporting.
MA reporting is process under which various managers communicates the relevant
information generated though MAS to top management for strategic decision making. In TPG,
MA reporting is made by production or divisional managers to top management, which assist
them in decision making:
 Cost accounting reports- Under this reporting system a detailed information of various
costs are provided by production and divisional managers. Cost accounting report assist
mangers in optimisation of various cost to ensure profitability. So basically it is important
in providing detailed information about cost of different activities of organisation. As
well as this report enables to companies in making aware about how much cost is
occurring in various kind of activities. In TPG processing company, managers with help
of this system identify any additional or unproductive cost in manufacturing and

production process which ultimately assist company to optimise costs and increase profit
margin. Through usage of the information included in this report, organisation have an
ability to made changes and improve efficiency of operations. The main essential
requirement of this system towards TPG that it helps in determination of the most
profitable determinant after comparison of all information present in cost centre report in
respect of the expenses and revenues associated with the same. This will results in
improvement of profitability
 Performance Report – These types report produced to review the performance of a
company as well as for each employee at the end of financial term. In every organisation
consist of various types of department so analysis of performance of these sections need
to prepare performance report. As per it, companies can analyse the efficiency of the
different activities as well as of the employees. With the help of this report, companies
can take corrective actions as per the areas in which improvement is needed. Manager of
TPG processing can use the report to know strength and weakness to make strategic
decision for the potential period of time. In addition, this report is required in company
for focusing on those activities whose performance is lower and as per it organisations
take corrective actions. Like in above TPG processing company, their managers get
detailed information about critical evaluation of each production activity that help in
better decision-making for future.
 Budget report – The particular report provide performance of company and help to
generate of small business, departments and large organization. A budget can based on
the predetermination where estimate of income and expenses of each department which
can help to unforeseen to circumstances of TPG processing company. Apart from it, this
report provide information about comparison between estimated income and actual
income which leads management of performance. Through particular report company try
to achieve their set goals and objectives. This report is essentially required for making
improvement in the operational capacity of above company.
 Inventory management report: It is mainly prepared by production and warehouse
manager of respective company mainly prepare this report. The reports holds the detail
information about the stock available in warehouses, goods in transits and finished goods
that are available for sales. It also provide the strength to supply chain of company so that

goods are always available in market. Such as in the above TPG processing company,
this report is essentially required to control inventories and for effective utilisation of
resources. For example the above company, get in touch about how much quantity of raw
material is available and on the basis of it they allocate it into various activities.
 Accounts Receivable Ageing Report: It is a kind of report which is associated to keeping
the record of all debtors which are occurred due to credit transactions. With the help of
this report companies can determine total collective amount in the market and
accordingly make plans. Apart from it, this report enables in determining those debtors
who are going to be insolvent. In the above selected company, they prepare it for keeping
record of due amount by debtors. As well as for enhancing the credit policies to minimise
the bad debts amounts. For example this report highlights the name of those debtors
whose amount is due even after the determined date of payment.
 Job cost report- This is a kind of report which consists detailed information about the cost
of different jobs associated in various activities. Eventually, the main purpose of this
type of report is to classify the cost of job in a systematic manner. Due to this report,
companies can aware about each job cost of each activities into multi-pal operations.
Hence, this report is essentially required in companies for minimisation cost of job as
much as possible. Such as in the TPG processing company, they prepare this report to get
the information about cost of job and to assess the information about how much part of
fund is allocated in the various activities of company's production activities.
Calculation of income statements.
Marginal costing method
Item
Number of
units £ Per unit Amount (£) Amount (£)
Sales 37000 70 2590000
Marginal Cost of sales
Opening Stock
Add – Variable production Cost
Direct Material 40100 16 641600

Direct Labour 40100 12 481200
Variable expenses 40100 20 802000
Total Variable Cost A 1924800
Less – Closing stock – end of year 1
B [opening stock units + Units
produced – units sold] 3100 48 148800
Marginal cost of sales (A-B) 1776000
Fixed indirect production cost 640000
Gross profit: (Sales – MCOS –
Fixed production cost ) 174000
Selling and distribution overheads 10000
Admin Overheads 15000 25000
Profit before interest & tax (PBIT) 149000
Interest expenses 1000
Profit before tax [PBIT – Interest] 148000
Tax @ 19% 28120
Net profit: Profit before tax – tax 119880
Item
Number of
units £ Per unit Amount (£) Amount (£)
Sales 41000 70 2870000
Marginal Cost of sales
Opening Stock 3100 48 148800
Add – Variable production
Cost
Direct Material 48100 16 769600
Direct Labour 48100 12 577200
Variable expenses 48100 20 962000
Total Variable Cost A 2457600
Less – Closing stock – end of
year 1 B [opening stock units + 10200 48 489600

Units produced – units sold]
Marginal cost of sales (A-B) 1968000
Fixed indirect production cost 64000
Gross profit: (Sales – MCOS
– Fixed production cost ) 838000
Selling and distribution
overheads 10500
Admin Overheads 15000
Profit before interest & tax
(PBIT) 812500
Interest expenses 1250
Profit before tax [PBIT –
Interest] 811250
Tax @ 19% 154137.5
Net profit: Profit before tax –
tax 657112.5
Item
Number of
units £ Per Unit Amount (£) Amount (£)
Sales 61000 70 4270000
Marginal Cost of sales
Opening Stock 10200 48 489600
Add – Variable production Cost
Direct Material 51100 16 817600
Direct Labour 51100 12 613200
Variable expenses 51100 20 1022000
Total Variable Cost A 2942400

Less – Closing stock – end of year
1 B [opening stock units + Units
produced – units sold] 300 48 14400
Marginal cost of sales (A-B) 2928000
Fixed indirect production cost 64000
Gross profit: (Sales – MCOS –
Fixed production cost ) 1278000
Selling and distribution overheads 11000
Admin Overheads 15000
Profit before interest & tax (PBIT) 1252000
Interest expenses 1500
Profit before tax [PBIT – Interest] 1250500
Tax @ 19% 237595
Net profit: Profit before tax –
tax 1012905
Absorption costing method
Item
Number of
units £ Per unit Amount (£) Amount (£)
Sales 37000 70 2590000
Absorption Cost of sales
Opening Stock
Add – Absorption production
Cost
Direct Material 40100 16 641600
Direct Labour 40100 12 481200
Variable expenses 40100 20 802000
Fixed indirect production cost 174000

Total Variable Cost A 2098800
Less – Closing stock – end of
year 1 B [opening stock units +
Units produced – units sold] 3100 48 148800
Absorption cost of sales (A-B) 1950000
Gross profit: (Sales – MCOS) 640000
Selling and distribution
overheads 10000
Admin Overheads 15000
Profit before interest & tax
(PBIT) 615000
Interest expenses 1000
Profit before tax [PBIT –
Interest] 614000
Tax @ 19% 116660
Net profit: Profit before tax –
tax 497340
Item
Number of
units £ Per unit Amount (£) Amount (£)
Sales 41000 70 2870000
Absorption Cost of sales
Opening Stock 3100 48 148800
Add – Absorption
production Cost
Direct Material 48100 16 769600
Direct Labour 48100 12 577200
Variable expenses 48100 20 962000
Fixed indirect production
cost 64000

Total Variable Cost A 2521600
Less – Closing stock – end
of year 1 B [opening stock
units + Units produced –
units sold] 10200 48 489600
Absorption cost of sales
(A-B) 2032000
Gross profit: (Sales –
ACOS) 838000
Selling and distribution
overheads 10500
Admin Overheads 15000
Profit before interest & tax
(PBIT) 812500
Interest expenses 1250
Profit before tax [PBIT –
Interest] 811250
Tax @ 19% 154137.5
Net profit: Profit before
tax – tax 657112.5
Item
Number of
units £ Per unit Amount (£) Amount (£)
Sales 61000 70 4270000
Absorption Cost of sales
Opening Stock 10200 48 489600
Add – Absorption
production Cost
Direct Material 51100 16 817600
Direct Labour 51100 12 613200

Variable expenses 51100 20 1022000
Fixed indirect production
cost 64000
Total Variable Cost A 3006400
Less – Closing stock – end
of year 1 B [opening stock
units + Units produced –
units sold] 300 48 14400
Absorption cost of sales
(A-B) 2992000
Gross profit: (Sales –
ACOS) 1278000
Selling and distribution
overheads 10500
Admin Overheads 15000
Profit before interest & tax
(PBIT) 1252500
Interest expenses 1250
Profit before tax [PBIT –
Interest] 1251250
Tax @ 19% 237737.5
Net profit: Profit before
tax – tax 1013512.5
Pricing strategies:
 Penetration pricing strategy- In this prices of products and services are kept below for
increasing market growth.
Advantage- This helps in increasing more and maximum customers because customers need the
products are low price.
 Skimming pricing strategy- Under this strategy, the prices are being kept high so that
reputation of launched product can be enhance.

Advantage- Its benefit is that it is useful for increasing profits for companies because high priced
products are considered quality products.
PART (B)
(a)Benefits and drawback of planning tools.
Budgetary control- This may be defined as a kind of process that defines about how
effectively managers use the budgets to evaluate actual performance in a particular accounting
period (Gibassier and Schaltegger, 2015). In broad sense, it is a process through which managers
set financial and non financial goals with the help of budgets then compare it with actual results.
In context of above organisation they use different kind of planning tools such as:
Budget- It can be defined as projection of income and expenditure for a particular time
period (Chiwamit, Modell and Yang, 2014). This is not necessary that budgets are used only for
the companies, these are also used by families, individuals, government etc. Like above selected
company makes the budget for a particular period which consists all the information related to
cost and revenue.
Advantages- Budgets are beneficial in evaluating the actual performance by comparing
with budgeted income and expenses. Like in the above respected company, they make the budget
for their accounting period.
Disadvantages- Sometimes it becomes difficult to estimate the income and expenditures.
Flexible budget- This budget can be flex if sales or volume change. These budgets are
suitable for long time period in which sales can be increase or decrease. The TPG processing use
it for variable activities during the budgeted time period. Its advantage and disadvantages are
described below:
Advantages- The advantages of this budget is that it is easy to use because changes can
be applied if sales change.
Disadvantages- Disadvantage of flexible budget is that it enables fraud in the organisation
because data can be manipulated by low performing employees.
Fixed budget- Under this budget, data can not be change if sales or volume get chnaged.
(Hasniza Haron, Kamal Abdul Rahman and Smith, 2013). The above respected company,
prepares this budget for short time duration.

Advantages- The advantage of this budget that financial managers do not require to
change or update the budget which saves time and cost.
Disadvantage- Companies can not change this budget if sales changes.
Incremental budget- This budget is prepared by making a few change in the existing
budget. In this type of budget only incremental amount is added to the existing budget to prepare
new budget. Its benefits and drawbacks are as:
Advantages- It is very easy to implement. So it can be useful for the TPG processing
company.
Disadvantage- Lack of innovation is disadvantage of it.
Zero based budget- As the name assists, this is prepared without taking base of any
previous budgets. Under it, each activity is justified. The TPG processing company use this
budget for various activities.
Advantage- This is beneficial because it brings efficiency.
Disadvantage- Costly and time consuming are main disadvantages.
Variance analysis- It is a kind of tool of budgetary control which is related to the
comparing actual income and expenditures with estimated standards. The TPG processing
company, use this tool for analysing the difference between the actual and standard levels.
Advantage- It measures the actual level of the performance.
Disadvantage- The drawback of the variance analysis is that lack of accurate
performance standard can be cause of inappropriate performance measurement.
(b) Use of planning tools in preparing and forecasting the budgets:
The various kind of planning tools are essential in making and forecasting budgets. It is
so because these planning tools provides necessary information to accurate forecasting of
budgets. Like in above organisation, they use different planning tools such as flexible, fixed,
incremental, ZBB etc. which help them to make their budgets.

(c)Comparison of organisation to solve the financial issues with the help of accounting
techniques.
In general, organisations face many kind of issue among them financial issue is one of the
biggest issue. This is why because it effects to other function and activities. In this kind of
problems, management accounting plays an important.
Financial issues- It is a kind problem which is regarding to the lack of finance or fund
(Edwards, 2013.). Due to these issues, other activities impact badly. Below some general
financial problems are mentioned:
 Increasing cost- This is type of issue which raises when company's cost increases higher
in relation to income. Such as in the above IKEA company, they are facing this issue
because of mismanagement of their financial resources.
 Lower profitability- In this companies face the issue of lower revenues and higher
expenditure. As the time passes it results in big financial issue. The Starbucks company is
facing this issue of lower profitability due to decreased sales. The reason behind this is
ineffective price pattern of their products
Techniques to deducting financial issues-
Ratio analysis- This is linked with the analysis of different kind of ratios so that actual
financial issue can be deducted. There are various kind of ratio such as profitability ratio, sales
ratio etc. With help of these ratio, organisation can find out actual financial problem. In the
above IKEA company, they use this technique to find out their issue. Such as their issue of
higher cost and lower profitability is being find out by calculation of profitability ratio. Hence,
this technique is useful to check the financial issue.
KPI- This is related to a method of focusing on those activities that are profitable for
them and which ones are not. Due to this companies can deduct financial problem. Like in the
above Starbucks company, their financial manager use this method to evaluate exact financial
issue. Such as their financial issue of lack of sales is being find out by focusing on those
activities which are leading to lower sales. Hence, by this they are able to deduct actual financial
issue.
Comparison:

Basis IKEA Starbucks
Financial issue The company is facing the issue of
higher cost in the manufacturing
operations. Due to this their other
profits are decreasing continuously.
In other words, their income is
decreasing but expenditures are
increasing. It is resulting in lack of
liquidity for completing day to day
operations.
They are facing the issue of lower
profitability and reason of this issue is
the lack of sales. Due to this their profits
are decreasing. The main reason of this
issue is the ineffective price setting of
products and services. It is resulting
overall as a big financial issue for them.
Method to
deduct
financial issue
To find out the actual finance issue,
the above company is applying KPI
technique. With the help of it, they
are analysing about those activities
which are higher cost consuming for
them.
They are applying ratio analysis
technique. With the help of it, their
actual financial issues are being find out.
Ratios such as sales turn over ratio can
help them in evaluate actual issue. The
key reason for which this issue is
occurring that is lack of sales that is
linked with poor system of price setting.
Accounting
system
The company's problem is solved by
applying cost accounting system.
This is related to a technique which
helps in managing all the
expenditure in an effective manner.
In addition by help of this
accounting system, they are able to
track actual amount of cost of their
operations. Due to this their
managers focus on those activities
that are higher expensive. As well as
it is helping them in minimising the
Above company's issue, is solved by
applying price optimisation techniques
that is useful in setting prices. It is a
kind of technique which helps in
determining the price effectively. By this
technique, their sell is increasing as well
as profitability. This accounting works
for them in a positive manner because by
this they assessed the customer's reaction
on multi-pal prices and as per it sales
department determined their price at an
effective level. Due to this their issue of

costs as much as possible. Thus their
income is increasing and expenditure
are decreasing which is resulting in
solving financial problem.
lower profitability is resolved
automatically because if sells will
increase then profitability will raised.
(d) MA for resolving financial problems:
MA is useful for solving any kind of financial problems. For example above mentioned
organisation, use cost accounting technique. Due to this their financial issue is resolved easily.
As well as another competitive company also apply price optimisation technique in resolving
their financial problems.
CONCLUSION
From above project report it has been concluded that management accounting is very
important in management of any kind of business. Under report, benefits and application of
various accounting systems like cost accounting system, inventory management system is
concluded. Along with different accounting reports like inventory reports, performance reports
etc. also defined. Additionally, drawbacks and limits of planning tools and use of MAS in
overcoming from financial problems is also mentioned.

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