Benefits of management accounting systems : Assignment

Management accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Meaning and requirement of types of management accounting..................................................1
Different methods of management accounting reporting............................................................2
Benefits of management accounting systems..............................................................................3
System and reports of management accounting integrated with organization............................3
TASK 2............................................................................................................................................3
Marginal and absorption costing..................................................................................................3
TASK 3...........................................................................................................................................6
1. Advantages and disadvantages of different types of planning tools used in Budgetary
Control.........................................................................................................................................6
2. Use of different planning tools and their application for preparing and forecasting budgets..8
3. Evaluate how planning tools for accounting respond appropriately for solving Financial
problems.....................................................................................................................................10
TASK 4..........................................................................................................................................10
1. Organizations are adapting management accounting systems to respond financial problems
....................................................................................................................................................10
2. Management Accounting can lead organizations to sustainable success by responding to
financial problems......................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is a internal accounting that use by managers for
manage and maintain organization through evolution. Managers of organization
evaluate and analyze books and accounts that helps in make planning, organizing,
directing and controlling. On the bases of financial performance they make effective
strategies for development and increase efficiency (Chenhall and Moers, 2015). It is
very important and it makes by management for short term and long term that helpful in
get quick information for decision making. This report will be cover that requirement of
management accounting, methods use in it, planning tools of this accounting, helps of
these tools for solve financial problems.
TASK 1
Meaning and requirement of types of management accounting.
Management accounting is very helpful in make financial report by managers
that useful for decision making because ABC ltd. Evaluate and analyze all report and
books than take decision for meet objective. Data of books and statement that is
prepared so all these documenting s evaluate by managers regarding cost, profit and
saving. So it is very important for ABC ltd for manage all works and activities and
increase profit. Following requirements of management accounting :-
Cost accounting systems :- this system of accounting is very useful for make
estimate of cost. Through this ABC ltd evaluate gap between cost and profit because
organization do all works for earn profit and increase revenue. It is a technique and tool
of reduce production cost of products and fix selling price. Cost accounting system of
past present and future evaluate by managers for making decision about budget,
investment and expand business so that is important for all types of organization.
Inventory management system :- this system of accounting majorly use by
manufacturing organization for trace all activities about stock. Management of ABC ltd
get all information about inventory and movement of stock and products. It includes
product from manufacturing to warehouse and warehouse to shipping. These things
make easy to management of inventory and making decision for increase profitability.
Through this system organization easily track whole supply chain and analyze quantity
of products running in work in progress (Bromwich and Scapens, 2016).

Job costing system :- it is very important for those organizations that produce
products according to demand of customers. Different types of peoples demand different
product design and quality so organization face difficulty in costing because it creates
difficulties for organization. So through this system it easily calculates all cost and
revenue of products according to per item. ABC ltd evaluate revenue on per product
because it main purpose is increase revenue and profit always earn more than it cost. On
the bases of this system management of organization take decision easily and make
strategy.
Price optimizing system :- this system of accounting is use by all types of
organization and through this it evaluates that customer reaction according to price of
products. So ABC ltd easily make decision about price and cost of products. Customers
always wants to quality products at low price and if price of product decrease so their
demand increase and organization attract customer through this easily. So management
of organization easily evaluate all things about customers and then provide according to
their choice and demand at reasonable price.
Process costing method :- this costing method use by organization that produce
mass products and organization face difficulties to calculate per unit cost. Products pass
from many process during production so each process contain cost separately. This
method make easy to calculate cost of process.
Different methods of management accounting reporting.
Management accounting is a technique of evaluation of all financial reports and take
decision for expand business and increase investment. Through this it makes budget on
the bases of tax, revenue and expenses. Following are different methods:-
Financial report :- this report includes many types of books and records that
keep by ABC ltd of whole financial year. It includes balance sheet, cash flow statement
and profit and loss account and income statement as well. Management of organization
use this account for evaluation and knows about all operation.
Pro forms cash flow :- this statement helps in keep all data and information
about flow of cash in ABC ltd as per financial year. Cash flow statement includes all
transaction that related to cash. Cash inflow and outflow is two part of this statement if
cash comes organization through sales of products and return on investment that it

includes cash inflow and if cash goes out from organization through give dividend and
purchase of raw material so it includes in cash outflow so management of organization
easily evaluate and make decision about invest (Bobryshev, 2015).
Sales report :- this report is very useful for all ABC ltd because this report
includes all data about sales of products. Through this it evaluates that sales increase
sources that helps in increase source and also analyze whole seller and retailer.
Management accounting make decision about efficient source of sales. It also motivates
through provide incentives and bonus to different sellers. That helps in motivate to
them.
Benefits of management accounting systems.
Management accounting is very important for organization because through this
it easily evaluates all cost and financial activities for making effective and efficient
decision about increase profit and expand business. Job costing system helps in
calculates easily cost of different products because without this system it is very lengthy
process. Cost accounting system helpful for evaluate cost and reduce cost that helps in
increase profit. Price optimization system is important for evaluate customers reaction
and know about their interest with price of products. All things are important for
management accounting because management of ABC ltd compare easily profit is more
than cost or not. It also makes decision according to situation for investment and expand
business (Nielsen, Mitchell and Nørreklit, 2015).
System and reports of management accounting integrated with organization.
Management accounting system is tool of control on cost and effectively manage
all activities that increase profit and revenue of organization. Through systems of this
accounting managers making effective decision for profitability. So they make decisions
after comparison of past present and future estimates of cost reports. Overall it useful for
making decision.
Management accounting reports use by organization and through reports like
cash flow statements, financial reports and income statement they compare all cost.
Through this it easily evaluates that profit earn by organization proper or not according
to cost incur in production and shipping.

TASK 2
Marginal and absorption costing.
Marginal cost :- Marginal costing is a principle that considered all variable cost in
product cost and all fixed costs are contained in period cost. It only related with cost of
inventories that incur in production of products by individual so through ABC ltd
calculate cost incur by one employee in produce products.
Absorption cost :- Absorption costing is contained all cost that is incurred in
production. So it includes variable and fixed cost because both are related to production.
It is divided as per distribution, selling and administration. It also provides fair and
accurate profit and also provide net profit per unit (Van der Stede, 2015).
production cost per unit
Cost of Direct material 10
Cost of direct labour 20
variable production overhead 5
Fixed production overhead costs 5
40
Total production cost
Units produced 18000
cost per unit 40
Total production costs 720000
Total cost of sales
Direct material 10
Direct labour 20

variable overhead costs 5
Fixed overhead cots 5
18000*40 720000
less closing stock 2000*40 80000
Cost of sales 640000
profit or loss statement for the month January
Marginal costing (Budgeted)
Details Amount(£)
Sales 800000
Less: Direct material 18000*10 180000
Direct labour 18000*20 360000
variable cost of production 18000*5 90000
630000 -630000
Add :- opening cost 0
Less: closing inventory 2000*35 70000 560000
contribution 240000
Less fixed costs 100000
Profit 149000
profit or loss statement for the month January
Marginal costing (Actual)
Details Amount(£)
Sales 800000
Less Direct material 19000*10 190000
Direct labour 19000*20 380000
variable cost of production 19000*5 95000
665000
Add :- opening cost 0

Less: closing inventory 3000*35 105000 560000
contribution 24000
Less fixed cost of production 100000
Profit . 140000
Interpretation:- from the above table I interpreted that actual profit is less than
expected profit because organization has budget and plan for produce 18000 units of
products and it produces 19000 units of products that these things direct effect it profits
and overall cost of production increase that net profit decrease. So budget is very
important accurately that helps in manage all cost and profit of organization.
Financial report
Profit or loss statement for the month January
Absorption costing (Budgeted)
Details Amount(£)
Sales 16000*50 800000
Less Direct material 18000*10 180000
Direct labour 18000*20 360000
variable cost of
production 18000*5 90000
Less fixed cost of
production 18000*5 90000
720000 720000
Add opening inventory
Less: closing inventory 2000*40
0
80000
640000 640000
Standard profit
adjustment :- under
160000
10000

absorption
profit 150000
profit or loss statement for the month January
Absorption costing (Actual)
Details Amount(£)
Sales 16000*50 800000
Less Direct material 19000*10 190000
Direct labour 19000*20 380000
variable cost of
production 19000*5 95000
Less fixed cost of
production 19000*5 95000
760000 760000
Add :- opening
inventory
Less: closing inventory 3000*40
0
120000 640000
Stndard profit 160000
Adjustment:
underabsorption -5000
Profit – actual 155000
TASK 3
1. Advantages and disadvantages of different types of planning tools used in Budgetary
Control
Budgetary control is the tool which identify the actual performance of the entity
by comparing the actual and expected result. Budgetary control is defined that how well
managers uses and makes the budgets to monitor and control the different costs' and
expenses in the business for a specific accounting period. In other words, budgetary
control is a technique for managers of the firm that they set their financial goals with

budgets, managers can compare the actual performance with expected performance and
adjust budget accordingly as it is needed.
Activity based budgeting
Activity based is the budgeting method firms can use this method to prepared
their budget. Activity Based Budgeting method define the overall cost of business
activity it is also included the overhead activities of the business and also contains the
associated costs of the business. It is a tool which maintain all the financial records and
analyses the activities that increase the costs of the business. Each department of the
business has incurred the costs of different activities by measuring the number of units
of cost driver for the expected activity level. Budgets are prepared by the manager of the
firm they make the budget on the basis of results.
Advantages
 It provides real value of costs for the manufacturing of the particular products.
 Activity-based budget focuses on managing activities of the firm to reduce costs.
 This technique identifying a business indirect cost activities.
 It helps to identify the profits margins of the particular product.
 It discovers the processes that are unnecessary and have wasted costed.
 It provides accurate value of costing and this method is easy for applying
 It helps to Identify the activities and their cost drivers.
 It helps to forecast the number of sales and number of unit orders for the budget
period
Disadvantages
 This process is costly as well as time-consuming it includes the more time for
collection of date and take time for preparation of data.
 The collection of data is sometimes is accurate it leads the cost.
 The collection and sources of data is not suddenly available from accounting
reports. This requires more research in order to collection the data.
 Sometimes this not be important for small organization because the overhead is
small in ratio to total operating costs
Zero based budgeting

Zero based budgeting is another tool of budgeting which describe that the budget
is starts from the zero base which means the budget of all expenses and cost are
Equitable individually in each period (What is Zero Based Budgeting (ZBB)?, 2018 ). In
other words, the zero based budget is starts form the Zero base and each activity within
an organization is analyzed ad identify for its needs and costs.
Advantages
 This process helps to identify the decision units.
 This process is determining and allocate available resources. This process
focuses on uses of resources.
 helps to eliminating the waste.
 it leads to employee involvements so it helps to collect more information.
Disadvantages
 This process is costly because it leads paper work
 Its only focus on short term planning not focus on long term planning
 Small business cannot use this method because it costly and time-consuming
Incremental Budgeting
incremental budgeting is also another way of making the budget. It is a budget
which is based on the preceding period's. This budget compare the expected budget to
actual budget to identify the cost of activity. It is most common approach that every firm
can use this approach to identify the overall cost activity of the business. Furthermore,
where businesses are not spent too much amount for formulating budgets. So firms
commonly use this method in their business to generate the profits.
Advantages
 This method is very easy to adopt and also this is the easiest method as compare
to other methods.
 Funding will continue in this method because it requires the limit fluctuations in
allocation of funds
Disadvantages
 This budgeting method does not encourage innovation because it only considers
the previous year data.
 This method is not identified the real expenses.

 The previous problem in budget is build the problem in current year budget.
2. Use of different planning tools and their application for preparing and forecasting
budgets.
Cash Budgeting
Cash budgeting is a budget which identify the income and cash expenditure that
is includes revenue and capital items. Cash Flow Budget should be prepared on the
basis of cash inflow and cash outflow. When cash is high which means the inflow of
cash is also high and in other side the cash flow is low so the outflow of cash is high. So
mainly cash budgeting is focuses on inflows and outflows of cash. It shows that the high
cash flows arising of the operational budgets. Furthermore, The main motive of any
entity is to maximize profits and generate high profit margin so firm makes proper
financial planning to achieve the objective and goal. Cash budget is effectively managed
Working Capital in the financial report of the firm also it is effectively managed by
preparation of cash budget. There are three types of cash budgeting.
Adjusted income method
Adjusted cash budget is calculated for managing the sales and revenue.
managers adjust the annual cash in flow and outflow by calculating the receipts and
payments. This method helps to identify the sales revenues and cost figures. So firm
can use this method to maintain their cash flows also eliminating non-cash items like
depreciation.
Adjusted balance sheet method
Adjusted balance sheet is calculate liabilities and assets of the firm. Company
makes the balance sheet to identify the weight of assets and liabilities. Increase in
liabilities and assets is affect the performance of business. Also, affect the owner's
equity and can be foretasted by the adjusted balance sheet method.
Receipts and payments
Receipts and payments it describes that high cash inflow is included in Receipts
and high cash outflow is contains in payments.
Sales budget.
Sales Budgeting is identified the sale of particular product it refers to a primary
forecast of sales. When sales is high its generate the high income and when sales Is low

its generate the low income. So the amount of profit is includes in sales budget as well
as included in income statements that is used to built out the projected income statement
for the business. Further, it also helps to compare the actual sale with expected sales. So
sales budget is forecast the income statement and contains planning for different
variables such as direct costs of goods sold and indirect costs of marketing. Therefore,
firm forecast the Sales in order to identify the cost of production, so sales has been
foretasted and firm makes the budgets in many forms and to achieve the objective of the
firm.
3. Evaluate how planning tools for accounting respond appropriately for solving
Financial problems.
The planning tools is helps to makes the budget appropriately because these
different budget tools helps to identify the overall cost of the business also, budget is
help to manage the money effectively its identifies the cost of the production which
helps to meet the objectives and goal of the firm, moreover, these methods also
identifies the problems such as the need of funds in particular departments, raise finance
or cash flow difficulties etc. so firm identify their problems and solve the problem to
makes the comparison between actual and expected performance of the firm.
Furthermore, the planing tool helps to improve decision-making, increase staff
motivation etc. so firm uses these techniques in their business to solve the overall
problem which helps to generate the high profit margin.
TASK 4
1. Organizations are adapting management accounting systems to respond financial
problems
In order to cope up with the financial problems organizations are adapting
various ways such as benchmarking, key performance indicators and budgetary targets.
Benchmarking
It is the process of measuring the performance of the Company's products and
services. It helps to identify the internal opportunities for the sake of improvement. It
refers to discovering what is the best performance being achieved in the Company
(Quattrone, 2016). This provide information that can be used to identify gaps in the

organization processes. It is the practice of comparing business processes and
performance metrics in order to respond financial problems.
There are four types of benchmarking -
 Internal Benchmarking – It is the comparison of business process to the similar
processes inside an organization.
 Competitive Benchmarking – This benchmarking do comparison of products and
services with the competitors.
 Functional Benchmarking – It is the comparison of similar or identical practices
within the same functions outside the contiguous industry.
 Generic Benchmarking – It is broadly conceptualizes the unrelated business
processes and functions that are adept in the similar ways heedless of the
industry.
Key performance indicators
It is the quantifiable measure used to evaluate the success of an organization.
The Companies are using Key performance indicators at multiple levels in order to
evaluate their success and for reaching their desired targets. There are two types of key
performance indicators namely, High level and Low level (Salterio, 2015). The high
level KPI's is focused on the overall performance of the business whereas Low-level
KPI's is focused on the processes in departments like marketing, sales, human resource
and production. Forecasters are unable to predict the future costs and revenues which
results into budget variances. It can be occurred from controlled or uncontrolled factors.
It is helpful in measuring the overall effectiveness of the organizations and helpful in
identifying the financial problems in order to achieve the organizational goals.
Budgetary targets to identifies variances and problems
It refers to the periodic measure that are taken by corporations in order to
quantify the difference between the projected budget and actual figures. It can either be
favourable or unfavourable for the organizations. Favourable budget variance refers to
positive variance or gains of the business while unfavourable budget variance describes
the negative variance or losses of the organizations (Schaltegger and Burritt, 2017).
Unfavourable variance requires the more serious solutions in order to identify the ways
of improvement. It is necessary to substitute the products that are cheaper. Budget

variances caused due to frequent bad assumptions and improper budgeting to derive an
usual easy budget target. Through discovering budgetary variances financial problems
get resolved.
2. Management Accounting can lead organizations to sustainable success by responding
to financial problems
Management Accounting develop a reporting strategy that integrates the
sustainable issues of the organizations in order to ensure that relevant financial and non
financial information is disclosed in the organization. It is the process of identifying,
measuring and reporting information about the economic events of the organizations. It
produces reports that includes data on sustainability impacts which helps to introduce
budgeting and taking major pricing decisions, investment appraisals and helps in doing
strategic planning (Otley, 2016).
Accounting techniques such as scenario planning of natural resource availability
and life cycle costing helps to integrate suitability matters into decision making process
of the organization. Management accounting techniques are developed to support
decision-making and controlling the activities regarding the environment legislation and
changing consumer behaviour which influence the needs for environmental information
(Nielsen, Mitchell and Nørreklit, 2015). It analysis and uses the financial and non
financial information in order to improve corporate sustainability.

Financial problems are as follows -
 Funding – The companies need enough funds for fulfil their capital
requirements. Thus, enterprise face difficulty while taking decisions about
which way they should opt to do financing in their business.
 Repaying cash – The major financial problem of firms is to raise their funds.
Thus, they borrow money from financial institutes or bank. There interest rate is
so high so company face difficulty in repaying their debts.
 Funding long term initiatives – Investors feels conscious to invest their money
in firms as they have fear for tying up cash for long duration.
 Cash flow – Managing Cash flow is also one of the severe financial problem.
The business bank accounts is in terrible conditions. Keeping track record of
clients receivables is hard task for industries.
 Economics Cycle – The economics crisis has potential impact on industries.
 Recording transactions accurately – Firms have to do accurate record keeping.
For long term monitoring of profits it is essential to correct financial data.

CONCLUSION
It is concluded from the above project report that Management Accounting is the
process of preparing management reports and accounts that provides accuracy in
financial and statistical information. The report also summaries that the Management
accounting is very crucial for the organization because through it organization evaluates
the business costs and perform financial activities in order to take managerial decisions
like expansion of the business. It is also concluded that the Zero based budgeting is
another tool of budgeting which describe that the budget is starts from the zero base
which means the budget of all expenses and costs are Equitable individually in each
period whereas Activity based budgeting is the tool which maintains all the financial
records and analyses the activities that increase the costs of the business. It is
determined that the Benchmarking helps to identify the internal opportunities of the
business for the purpose of the improvement.