Management Accounting: Types, Techniques, and Planning Tools

This article provides an overview of management accounting, including different types of management accounting systems, techniques, and planning tools. It discusses the advantages and disadvantages of each method and how they can be applied in business. The content also includes a case study of British Electrical and Manufacturing Company.

Management Accounting Business
Faculty of Business and Management Studies
Management Accounting
Submitted by:
Session: February 2020
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Management Accounting Business
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INTRODUCTION
MA is the provision of financial data and provides assistance to the management of the
organization. This is the procedure of financial report, records and account to assist the
management for making better decision process for achieving business goals. This creates more
effectiveness for business. The preset report is based on British Electrical and Manufacturing
Company which is manufacturing company. The report will explains about the concept of MA
along with various MA systems and its significance to the business organization. This will also
state about various methods of management accounting (MA) reports. It also includes
application of various management accounting techniques of cost analysis by preparing financial
statement by using marginal and absorption cost technique. Report will covers pros and cons of
planning tools. At the end of report will compare organization adapting MA system for meeting
the various financial problems.
LO 1
Different types of management accounting system
MA is consists with the managerial accounting and with the internal system of business
utilizes to measures and in evaluating the complete business process. Financial accounting
system works on with the provision information to the external users of the companies like the
stakeholders and creditors. Management accounting system is important because that is help to
improve productivity and production capacity of company in effective manner. This process is
higher profitable and beneficial for greater market share for their business growth as well as
development. This system is providing complete relevant data to businesses to be utilized in
business activities and decision making. There are different forms of management accounting
(MA) system which are help to company for managing their effectiveness and making proper
reports of working. Here, is measures management accountings systems are as follows:
Inventory management system (IMS):
The IMS is the combination of technology as well as the process and procedures which is
overseen monitoring or maintenances of stocked products. This is the process which is help to
track products and services throughout the entire supply chain management from purchasing to
production to sales (Otley, 2016). In the context of British Electrical and Manufacturing
Company can track their inventory properly within the business. This creates the more
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advantages for company such as cost saving, saves time, increased efficiency. Through that
company gets updated knowledge and details about inventory available into company and its in
warehouse. On the other side, having some disadvantages limited elimination of business risk or
complexity in the absence of proper data.
Cost accounting system:
This MA system is generally useful for manufacturing concerns to keep the records of all
the manufacturing activities into the inventory management system. In simple words, it is an
accountings system which is mainly developed for manufacturing firms to easily track the flow
of stock on a continuous basis along the different stages of manufacturing (Cooper, Ezzamel and
Qu, 2017). Through this system, British Electrical and Manufacturing Company are able to track
all those expenses and findings out the profitable costs. Through that company have great
advantage which is help on cost control, build effective decision making power and the most
important thing is to find out the ideal capacity of business. However, having some disadvantage
such as system is more complex, not suitable for small scale companies and this is based on
estimation.
Job costing system:
Job costing system is the process which is used by the business organization for assigning
cost incur to a particular job and activity which is tangled with them into the business. Through
this technique of costing the work can be carried out in an effective manner. With the help of
this, British Electrical and Manufacturing Company will be able assign cost to its respective
account and also helps in representing the accurate results. That is includes direct cost, labor cost
and overhead charges. Through that company have great opportunity to find out the defective
work and products (Weetman, 2019). However, having disadvantage in fixed prices for the
complete process by recoding cost of products and services.
The above are the effective MA system which assists the company for find out the
problems as well as stock of inventory. Those are to create best records of inventory and work
process.
Different methods of management accounting reports
Management accounting report is generally build for making proper and effective
planning, regulating as well as formulating decision making within the company. this is provide
complete relevant information to the manager of company which is enables for preparing
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decisions for solving issues in respective manner. Some of the important MA reports are stated
below.
Performance report:
This report is reflects about the performance of each and every person and process. That
is creates complete effectiveness for British Electrical and Manufacturing Company for analysis
efforts and efficiency which is perform by company. Therefore, through this report, the company
would be able to analysis the potential of its employees, management and strategies. This is
reveals variances between the efforts that are given by employees. In that user of this report is
completed liable for perform corrective actions for improving performance which have required
for business. Unilever management prepare performance report of employees so that employees
can be rewarded, provided with required training and change accordingly.
Account receivable report:
This is completed receipts uses by organization or not had received for attending right in
its near future. This is completely refers with the statement which have all the information about
the debtors in respect to amount due, due date, terms of credit and so forth. (Maas, Schaltegger
and Crutzen, 2016). Through that management of the British Electrical and Manufacturing
Company is highly able to maintain account receivable report so that to amount can be recovered
within the time frame, avoid the chances of bad debts and liquidity position of the company can
be improved as well as the credit policies of the company can be updated as per the requirement.
Budget report:
Budget report is based on the proper details of performance evaluation of organizations
performance in an effective manner. This report is show indirect comparison of actual as well as
accurate result of company for preparing budget plan. That is help to identify proper differences
between actual and accurate results. Like: when British Electrical and Manufacturing Company
is used this than it is able for comparing past performance of company with current one as well
as implement such actions for gaining high margin of profit (Shields, 2018). Budget report will
also include revenue or cost of British Electrical and Manufacturing Company and later work for
profits increases. This is the proper and effective development for company and its management
in order to gain proper knowledge of performance of all the departments as well as individual
performance within the organization.
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Management Accounting
System
Benefits
Cost Accounting System  This system provides disclosures the profits as well as
unprofitable activities.
 Company is able to minimize its cost production which
results into cost saving.
Inventory Management
System
 British Electrical and Manufacturing Company would be
able to enhance its customer satisfaction level.
 This strategy is help to increase efficiency and
productivity (Hopper and Bui, 2016).
Job costing system  This provide the basis for eliminate cost of the similar
jobs that are taken within the future of business entity.
 Through this system, company is able to gets complete
details of cost material, labour and overhead for the each
job.
The MA system and report are necessary and important part of company. Through this,
organization is gets proper policies implementation, procedure, process as well as structure for
reporting process. Through that company is able to maintain the accounting system in such a
manner that it will not only able to collect information but classified data in a systematic way
that management can utilise systems and reports. Similarly, there are several aspects of reports
that are help to provides variances which are mention within the reports. Management
accounting system has help to develop complete statements for working by managing inventory
and others. on the other side, management reports have been help to make complete budget and
working process. Management enables administration for coordinate in the different levels and
departments of organization which results into creating effective system (Quattrone, 2016). In
order to understand in better or effective manner, here is taking example: in case the inventory
management is not working properly, than it is create difficulties for company to keep records of
inventory and accurate variances not measures able into inventory system. In that case, report
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and system both are sometimes not able to provide reliable and accurate information to system,
so managerial teams may not be able to solve the problems of customers. Hence, that it is must
for British Electrical and Manufacturing Company for managing both the MA system and
reporting in order to progress and grow.
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LO2
Various types of management accounting techniques
There are various forms and the forms of MA techniques which is being put to use by the
organization for the purpose of effectively managing its business operations. The two widely
used MA techniques is stated below along with the illustration to understand it better.
Marginal costing: It is basically the accounting technique being used in cost accounting
and MA for analysing the relationship between the cost, volume and the profits in respect to the
change in the level of activity. Under this system, the goods and services and the stock of the
business organization is evaluated and valued at the variable cost only. This approach ignores the
fixed cost of production (Elshahat, 2016). Sometimes this technique is also called direct costing
as it considers only the direct cost as the part of product and stock. It is bifurcated based on the
fixed cost and the variable cost. Under this, the per unit cost of the good remains as it is
irrespective of the level of production because it is valued at variable cost. It is mainly used by
the businesses for the purpose of determining the break even point for identifying the right level
of production and sales price. This technique helps in evaluating the right level of production
activity of the business where it costs very least amount for producing the additional units of the
product. This spot is known as sweet spot where the business can maximize its profits.
Absorption costing:
This technique is different from marginal costing in the aspect that it includes both the
cost, that is, fixed and variable cost for determining the manufacturing cost and the valuation of
the inventory cost. Each product is impacted by the some share of fixed cost and therefore, the
profitability associated with the product is affected by the fixed cost (Parkhi, Tamraparni and
Punjabi, 2016). This technique means that the indirect cost is being charged to the expenses in
that particular period whereas the material cost and variable overheads are assigned to the stock.
Under this, the cost per unit decreases, as the quantity of units under production rises, as the
fixed cost is spread across the quantity of units and the variable cost per unit remains same. It is
highly preferred for the external reporting purpose.
The cost has been bifurcated into fixed cost and variable cost which are stated below.
Fixed cost: It is the constant cost which does not change against the change in the level of
activity. It is necessary in short term cost accounting.
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Variable cost: This cost varies with the variation in the production level. When no goods are
produced in that case there will be zero variable cost.
British Electrical and Manufacturing Company are looking to manufacture the new set of
products, for which cost related details are provided in Appendix.
Analysis and interpretation:
It can be clearly seen that there is a significant amount of difference between the amounts
of profit evaluated from these two methods. Under marginal costing, the profit for the quarter is
28000 which are very less in comparison to 40000 derived under absorption costing. This
deviation is because of consideration of both fixed and variable cost under absorption costing
rather than just variable cost under marginal costing. Also, since, the accounting principles like
GAAP and IFRS require absorption cost for the reporting purpose and also require allocation of
overheads to the inventory. The major difference the two methods, is that absorption costing
system includes fixed overhead expenses while evaluating the cost of production which is not in
case of marginal costing.
LO 3
Advantages and disadvantages of different planning tools.
Planning tools are refers with the formal business statement which is provide complete
details for eliminate and estimation of revenue and cost of business for a particular time period.
This is assist with the effective allocation and collaboration for the financial resources of
organization. There are different forms of tools and techniques which are British Electrical and
Manufacturing Company can based within the budgetary control are explains below:
Zero based budgeting:
Zero based budgeting is effective control technique that is prepared from the zero level as
well as not consider into the past budget. This approach is highly useful for defining cost
structure of the British Electrical and Manufacturing Company (Christ and Burritt, 2017). Budget
calculation is in approach carries out with complete and proper research that is based on budget
is prepared after analysing external factors that might affect the budgeting. The budget is
prepared every year. This creates more advantages and disadvantages for company are reflects
here: advantages are Zero based budgeting is started with zero every time it prepares budget and
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This helps in exercising control over the costs and expenditures of organization. on the other
side, disadvantages are: Zero business budget requires exercising lot of time as everything starts
from beginning as well as It is little costly method to be used by organisation for planning
purpose.
Capital budget;
This budget is formulated by the business entity which helps in meeting capital asset
requirements of the business. These assets are useful in the manufacturing process of the
company. It also involves the complete analysis of the investment through the usage of the
capital budgeting techniques which helps in determining the viability of the investments and
capital projects. There are various kinds of advantages and disadvantages for British Electrical
and Manufacturing Company that is created by capital budget (Soderstrom, Soderstrom and
Stewart, 2017). Advantage: it is help to company for analysing requirement of capital assets for
production process as well as analyses the capital needs of the business. With the help of this, the
organization would be able to know about the profitability along with the feasibility of
investment plan of business is considering for investment purpose. On the other side,
Disadvantages: This budget may lead to inaccurate information with respect to investment. It is
completely based on the estimation of cash inflow, generated through investment.
Activity based costing:
This is refers with the various kinds of budget methods those are mentioned into the
business which is prepared by using activities of companies. This is completely based on
estimation made with resources which is used and allocated with such levels of revenue will be
effective generates. This is not included into the past budgets by considering purpose of current
year budgets. Using this method, the company is able to the determine costs and expenses which
are attached with various business activities from the production process. This activity is reflects
about the identification into production system that had reflects the cost and wastages into
process with timely actions for managing situations (Honggowati and et.al., 2017). This creates
more advantages and disadvantages for British Electrical and Manufacturing Company.
Advantages: this is simple to implement within the organization as having requires less time as
well as tool helps for determining discrepancy in such production activities and process. On the
other side, disadvantages: it is having required making professional and personal skills as well as
knowledge. This tool is expensive for the main purpose with business entities.
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Variance analysis:
Under this, the actual performance is monitored and compared with the standards set
which helps the company in evaluating their performance and strategies. This provides support in
evaluating the cost and exercising the cost control over the business practices. Through this,
remedial actions can be taken to improve the situation.
LO 4
Compare different management accounting system to respond financial problems.
Financial problems includes monetary and fund related issues But, most of the time
issues are being faced by British Electrical and Manufacturing Company is stated below:
Delay in receiving payment from the customers’ side is the biggest financial problem. In
that British Electrical and Manufacturing Company relies credit term of business and they have
to sell their products on credit customers. Sometime customers are from internationally and
unintentionally fails to make the payment of amount on time which is called as delay in payment
from customers. This may cause a huge and biggest problem for manufacturing company like
British Electrical and Manufacturing Company it become a regular practice of customers.
Key performance indicator:
KPI is used for measuring performance of company and establishment. This is used for
determining the efficiency of the company both monetary and non monetary operations British
Electrical and Manufacturing Company. With KPIs, the company can put complete focus on
high performance activities those are leads goals and objectives of company. This indicator is
used by top level management of British Electrical and Manufacturing Company they have
responsible for solving problems of finance (Collis and Hussey, 2017). The higher level
management of British Electrical and Manufacturing Company uses KPIs for identifying
financial issues for unforeseen the future expenditure and economic cycle those are very major
issue for company and the business entities. In that company require motivating employees by
giving them opportunity and support. Thus, with the use of this, the company is able to manage
work by analysing their performance of work.
Benchmarking:
Benchmarking is effective process for setting measurement for each operation and for
employees. This helped to sets out the goals for achieving conveniently on time. In this process,
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management is able to analyse strategies of those industry or sector as well as apply policies and
the relevant regulation within the company (Abernethy and Campbell, 2018). Through this, the
administration of British Electrical and Manufacturing Company is able to standardise its credits
terms policies and liquidity position. That is helped to find out all the problems and issues which
are caused because of delay in payments from the clients and weak resource management.
Therefore, company is able to measures each and every options and operations for solving
financial issues.
Balanced scorecard:
Balanced scorecard is best performance metric through that company is able to make
strategic management. That is help to identify as well as improve internal business functioning
which results into enhancing and improving the outcomes of it. It is utilized to measures and
provides reviews to organization. This provides support in the future for solving any types of
problems those will be face by company (Schaltegger and Burritt, 2017). This helps to British
Electrical and Manufacturing Company in order to building strategic planning as well as the MA
system, by integrating the shared vision for achieving success and to get people working in the
right direction and concentrating on outcome.
With the help of this, company is able analysis the performance of whole company and
find out financial problems and issues which are faced by company. Through that company
analyse issues and try to solve by setting goals and objectives as well as working process.
Analysis of how management accounting can lead an organisation to sustainable success:
MA play as a crucial role for identifying the solution of financial issues in order to get
sustainable success for company. MA is the best process of renders various planning tools such
as reports which provides assistance for the administration in case of forecasting and
implementing plans for profitable objectives for attaining the success of whole organization and
British Electrical and Manufacturing Company.
Planning tools respond appropriately to solving financial problems to lead organisations to
sustainable success
The strategic planning tools are most important aspects that are reflects how management
accountants works with the aim of identifying of financial troubles. These planning tools like
capital and cash budgets are utilized in the production information. These issues may arise in the
business organization within a specific time frame and techniques such as KPIs and
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benchmarking are the best ways to make proper differentiate external and internal manageable
financial factors (Nuhu, Baird and Appuhamilage, 2017). With the assistance of MA methods
such as financial governance, the financial problems can be easily identified before time so that
timely actions can be taken to tackle with it by implementing strategies such as meeting with the
statutory requirements etc. can be considered on time so that British Electrical and
Manufacturing Company may achieve sustainable success.
CONCLUSION
It can be summed up from the above that the MA has very important aspects for
company. With the support of MA, company has able to maintain their whole performance and
statements of company for managing strategic directions. The main purposed of prepared this
report to analysing various planning tools and techniques, methods and framework used by
managerial accountant. The report had been covered by with various accounting system for
generate reports, budgetary control, benchmarking and key performance indicator. At the end of
report also highlighted how the management forecast future plans, introduce relevant and
required policies and procedures along with issuing guidelines as well as evaluating the
performance and take corrective steps in respective manner.
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REFERENCES
Books and Journals
Abernethy, M.A. and Campbell, D., 2018. Virtual Issue on Empirical Management Accounting
Research. Journal of Accounting Research, August.
Christ, K.L. and Burritt, R.L., 2017. Water management accounting: A framework for corporate
practice. Journal of cleaner production. 152. pp.379-386.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
Higher Education.
Cooper, D.J., Ezzamel, M. and Qu, S.Q., 2017. Popularizing a management accounting idea: The
case of the balanced scorecard. Contemporary Accounting Research. 34(2). pp.991-
1025.
Elshahat, M. F., 2016. RESOURCE CONSUMPTION ACCOUNTING: THE CHALLENGES
AND APPLICATION OBSTACLES. International Journal of Business, Accounting, &
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Honggowati, S. and et.al., 2017. Corporate governance and strategic management accounting
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Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research. 31. pp.10-30.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting. Journal of Cleaner Production. 136.
pp.237-248.
Nuhu, N.A., Baird, K. and Appuhamilage, A.B., 2017. The adoption and success of
contemporary management accounting practices in the public sector. Asian Review of
Accounting.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
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Parkhi, S., Tamraparni, M. and Punjabi, L., 2016. Throughput accounting: An overview and
framework. International Journal of Services and Operations Management. 25(1). pp.1-
20
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31. pp.118-122.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts
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APPENDIX
Cost details:
Particulars
Sales and production 800 units
Sales 1600000 pounds
Production costs:
Variable costs 640000
Fixed costs 160000
Selling and distribution cost
Variable cost 320000
Fixed costs 240000
Normal level of activity in a year 800 units
In first quarter:
Units produced 220
Units sold 160
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Particulars
Sales revenue (A) (160*2000) 320000
Less: production costs:
Variable cost (220*800) 176000
Fixed costs (220*200) 44000
Add: Opening stock -
Less: Closing stock (220000/220*60) -60000
Cost of goods sold 160000
Less: Adjustment for over-absorption of
fixed production overheads
(1/4 of 160000) –
44000 -4000
Add: Selling and distribution overheads:
Variable cost (160*400) 64000
Fixed costs (1/4*240000) 60000
Cost of sales (B) 280000
Profit (A)-(B) 40000
Profits for the quarter under absorption costing
Particulars
Sales revenue (A) (160*2000) 320000
Less: production costs:
Variable costs (220*800) 176000
Add: Opening stock -
Less: Closing stock (176000/220*60) -48000
Variable cost of goods sold 128000
Add: Selling & Distribution overheads:
Variable cost (160*400) 64000
Cost of sales (B) 192000
Contribution 128000
Less: Fixed cost:
Production costs 40000
Selling and distribution cost 60000
Profit 28000
Profits for the quarter under marginal costing
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Profit reconciliation statement Amount
Profit under absorption costing 40000
Less: Fixed production overhead (60*200) 12000
Profit under marginal costing 28000
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