Benefits of Management Accounting Systems and their Application

This article discusses the benefits of management accounting systems and their application within an organizational context. It covers topics such as cost control, inventory management, price optimization, decision making, and more.

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Contents
.........................................................................................................................................................0
Introduction......................................................................................................................................4
Explain management accounting and give the essential requirements of different types of
management accounting systems.....................................................................................................4
Explain different methods used for management accounting reporting..........................................6
Evaluate the benefits of management accounting systems and their application within an
organizational context......................................................................................................................7
Integration of management accounting systems and reporting within the organisation.................8
Calculate costs using appropriate techniques of cost analysis to prepare an income statement
using marginal and absorption costs................................................................................................9
Accurately apply a range of management accounting techniques and produce appropriate
financial reporting documents.......................................................................................................12
Advantages and disadvantages of different planning tools...........................................................12
Analyse the use of different planning tools and their application for preparing and forecasting
budgets...........................................................................................................................................15
Compare how organisations are adapting management accounting systems to respond to
financial problems.........................................................................................................................16
Analyse how, in responding to financial problems, management accounting can lead
organizations to sustainable success..............................................................................................18
Critically evaluate how planning tools for accounting respond appropriately to solve financial
problems to lead organizations to sustainable success. Use examples from your chosen
organization...................................................................................................................................18
Conclusion.....................................................................................................................................20
References......................................................................................................................................21

Introduction
Management accounting and management accounting system is a systematic way of organising
accounting data of an organisation and make informed decisions about future cost and profit
planning. Every organisation needs management accounting to help organising daily
transactions. In an organisation tons of transactions happen regularly. You cannot keep track on
them if you don't give an entry. You cannot manage an organisation without knowing the cost
and profit. Management accounting system give entries to your daily transactions, keep track on
accounts receivable and accounts payable and find cost and profit. With these statements
organisation take further important decisions like whether they need to increase production or
not, whether they need more employees or cut employees etc. In this report we will learn about
the importance of management accounting and management accounting system, their integration
within the organisation, different accounting techniques and their applications.
Explain management accounting and give the essential requirements of
different types of management accounting systems.
Management accounting is the systematic way of recording every transaction within the
organisation which is later used for decision making and increase the efficiency and productivity
of the organisation. It is also called managerial accounting or cost accounting. Managerial
accountants keep track on every organisational transactions and turn the data into useful method
for decision making. The main difference between management accounting and financial
accounting is that management accounting report is actually made for internal decision making
process where the financial accounting report is made for external parties for audit and tax etc.
Role of management accounting: management accounting record data of an organisation. So
any member of the organisation can read the data and understand what is going on. Financial
accounting has to maintain some rules to store data so it is somewhat tough to understand for
everybody. Where a non-accountant can also understand management accounting report. Seeing
the management accounting report the leader can see where this organisation is going and what
is needed to be fixed or solved (Otley, and Emmanuel, 2013). Management and leader can see

the current financial situation of the organisation by seeing the report. This report is ready for
any time to use. An internal member can see it whenever he wants to see previous records.
Principle of management accounting:
The four main principles of management accounting are shortly discussed below:
Management by exception: through this principle management accounting explains that the
management accounting report is prepared by following necessary rules (Coase, R.H. 2006).
Different tools and techniques are applied to the management accounting report to provide a
transparent and accurate data to the management of the organisation.
Overhead cost: this cost is calculated by recognising the indirect cost that is connected with the
production process of the organisation. This helps to find out the production cost individually
(Gupta, Pevzner, and Seethamraju, 2010.). Also through this management can predict how much
money has been consumed in each production segments.
Control at source accounting: this principle find out the financial sourcing, observe the cost
and analyse how the cost can be minimized. By analysing previous data before the cost occur
management analyse how they reduce the cost and increase productivity.
Accounting for inflation: this principle considers the inflation rate of currency. The costs that
are consuming and the profit that are gain may be not be the same in different times. So by
calculating inflation rate, management accounting can actually tell how much is in your hand.
What is management accounting system?
Management accounting record business transactions and help them to transfer into useful
information. On the other hand Management accounting system helps to utilise those data and
make further decisions for the organisation by using different tools and techniques. Different
types of management accounting systems are shortly described below:
Job costing system: in this system organisation keep track on the production cost of an
individual products. This is mainly used for keep track on every identical product’s costing. For
example, Cream ltd are selling ice cream, waffles, doughnuts. There will be different pricing
system of each product as each has different costing. And the costing is measured by job costing
method.

Price optimising method: a price of a product is not only dependent on the product costing. It
can be vary from different situation. For example, in summer, the demand of ice cream will high
and in winter vice versa. So according to the demand organisation has to decide the price and
they decide the price through price optimising method.
Cost accounting system: this method is used for minimise the cost and increase productivity.
Through management accounting report managers analyse the cost and find out where the cost
can be reduced (Horngren, Bhimani, Datar, Foster, and Horngren, 2002). Two methods are used
in this cost reduction system. One is job order costing which is used by changing the order of job
for the employees and another is process system where change in production process is
introduced.
Inventory management system: in this system the amount of inventory in store is managed.
Estimating the demand according to the season the inventory is kept. In this system they try to
reduce waste and inventory cost.
Explain different methods used for management accounting reporting.
What is management accounting reporting?
Management accounting report is referred to a written statement of current financial condition of
an organisation. This report helps an organisation to take informed decision and take necessary
actions to reach organisational goal. Different types of management accounting reporting
techniques are given below:
Budgeting report: this kind of report analyse current performance of the organisation, analyse
past experience, cost and benefits, observe the changes in productivity and make a budgetary
decision for the upcoming year (Zimmerman, and Yahya-Zadeh, 2011). In this report the budget
of product costing and inventory are decided. Also they apply this budget to optimise
productivity.
Account receivable report: this report find out the amount customers owe to the organisation
and the period of time. It helps the cash collection process and determines how much time a
customer is taking to pay his due.

Job cost report: in this report the labour cost is determined. How much effort an employee is
given and how an employee should give to reach organisational goal is determined here. It
calculates the job expenses and necessity and productivity of each worker.
Inventory report: this report is made to make the production process more efficient. It
determines how much inventory should be gathered each season to maximise productivity and
reduce wastages.
Performance report: in this report the employees’ Performance of every department is
measured by using some techniques like key performance measures. It determines the gap
between expected Performance and current performance and find out the solution to fill up the
gap.
Business opportunities report: this report is made for find out the current market opportunities
to grab for the beneficial of the organisation. It determines opportunity cost and helps the
organisation decide which opportunity to choose.
Evaluate the benefits of management accounting systems and their application
within an organizational context.
The benefits of Management accounting systems are provided below in the context of Coca-
Cola:
Cost control: Management accounting systems assists Coca-Cola to produce budgets such as
cost budget, production budget etc. these budgets help the organization to curtail unnecessary
cost from their business operations.
Inventory management: Management accounting systems let Coca-Cola to know actual and
optimised level of inventory so that the organization may not face over production or under
production.
Price optimization: Management accounting systems forecast demand with sell production and
that helps Coca-Cola to set the optimized price for their products.
Decision making: Coca-Cola prepares various financial statements and analysis such as cost-
benefits analysis, break even analysis with the help of management accounting systems and that
help them to make accurate decision.

Now let's discuss the application of management accounting systems in the context of Coca-
Cola:
Assessment of risk: Management accounting system helps Coca-Cola to evaluate and estimate
the probable risks and uncertainty and prepare organisation accordingly.
Resource allocation: this system is used for allocation of resources so that resources can be used
perfectly by Coca-Cola and each resource can be utilised properly.
Measuring performance: Management accounting system is used for measuring the
performance of management of Coca-Cola and employees and find out the gap between
expectations and reality (Ward, 2012).
Financial statements: Management accounting system is used in Coca-Cola for making
financial statements. Initially data is stored in management accounting system. Later those data
are transferred to make useful information and make financial report for external users.
Integration of management accounting systems and reporting within the
organisation
Management accounting systems is the process through which a business organization use
information from it and make effective decision. Management accounting systems has great
advantages to business process of Coca-Cola as it is integrated with the process of production of
the company. Such as, management accounting systems develops various budgets; cost budget,
production budget, inventory management, production management etc. that ensure Coca-Cola’s
manufacturing process is performed successfully. One of the drawbacks of management
accounting systems is it requires huge amount of expertise to be performed and integrated with
the process properly (Marsh, 2012).
Management accounting reporting is something that plans, regulates, makes decisions and
measures performance for Coca-Cola and it is integrated with the manufacturing process of the
organization. Management accounting reporting generates various report such as income
statement, financial statements etc. that let the managers of Coca-Cola to evaluate their success
or performance and track down the production process and its progress to make successful
decision.

Calculate costs using appropriate techniques of cost analysis to prepare an
income statement using marginal and absorption costs.
What is cost?
Costs are the expenses which are occurred during production, from production of a product to
selling those to consumers. In short, from producing a product to sell that product the money
related expenses that happen are called cost. There are two types of cost in production. One is
fixed cost another is variable cost. The fixed costs are remaining same for every product and for
every time. For example, land and machinery cost. The variable costs vary from product to
product. Every product doesn't need same amount of raw materials or doesn’t require same level
of labour cost. So variable costs vary every time (Spathis, and Ananiadis, 2005). For example,
raw materials cost, labour cost. Again there are two types of cost while calculating the income
statement. They are marginal cost and absorption cost. They are shorty described below:
Marginal cost: marginal cost only considers the inventory cost that has been used in production.
It doesn’t recognise the fixed overhead cost. Marginal cost cannot be used in financial reporting.
Absorption cost: in this method the inventory cost that hasn't been occurred yet is also
considered and the fixed cost overhead is calculated to know the actual production cost.
Absorption cost is applicable in financial reporting. Due to cost differences the profitability in
marginal costing and Absorption costing method are different.
Now according to the marginal cost and absorption cost and loss and profit statement of MS ltd
is given below:
Determining Marginal Costing:
Direct materials 300
Direct wages 200
Variable production o/h’s 50
Unit cost 550
Income statement of MS Ltd of 30th June, 2018 using marginal costing technique:

Amount Amount
Sales 800
Marginal cost of sales (550)
Contribution 250
Fixed cost:
Administration overhead:
Fixed
100
Selling overhead: fixed 50
(150)
Net profit 100/=
Income statement of MS Ltd of 30th June, 2019 using marginal costing technique:
Here the marginal cost of 2019 will be 440 as the production was utilized 80%
Which means, 550*80%
Amount Amount
Sales 1000
Marginal cost of sales (440)
Contribution 560
Fixed cost:
Administration overhead:
Fixed
100
Selling overhead: fixed 50
(150)
Net profit 410/=
Determining Absorption Costing:
Direct materials 300
Direct wages 200

Variable production 50
Fixed Overhead Cost 200
Total Cost of Production 750.00
Income statement of MS Ltd of 30th June, 2018 using absorption costing technique:
Amount Amount
Sales 800
Marginal cost of sales (750)
Contribution 50
Fixed cost:
Administration overhead:
Fixed
100
Selling overhead: fixed 50
(150)
Net loss 100/=
Income statement of MS Ltd of 30th June, 2019 using absorption costing technique:
Here the absorption cost of 2019 will be 600 as the production was utilized 80%
Which means, 750*80%
Amount Amount
Sales 1000
Marginal cost of sales (600)
Contribution 400
Fixed cost:
Administration overhead:
Fixed
100
Selling overhead: fixed 50
(150)

Net profit 250/=
We can see the difference between the two type of costing. Using marginal costing both year
there were profit, but in case of absorption costing there were loss in 2018 as the saes rate was
lower. By using absorption costing we can get the actual costing of the product manufacturing.
Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents.
Now let's discuss the various range of management accounting techniques that can be applied:
Product costing: this includes the total cost during manufacturing a product; it adds variable
cost and fixed cost to calculate the total manufacturing cost. This technique helps the
organisation to decide the product pricing (Macintosh, and Quattrone, 2010).
Micro economic technique: in this technique a budget is made to determine the cost, reduce
cost and take necessary actions when needed. This type of budget can help the organisation in
case of charges.
Cost of inventory: it recognises the beginning and ending inventory cost, the stocking and
storing cost and tries to minimise wastages in the inventory. It determines how much inventory
should be stored to minimise inventory cost and increase productivity.
Valuation method: there are various ways to decide a pricing strategy for your current product.
For example it can be varied from season to season, demand or rarity of the product, rarity of raw
materials, product costing, and management cost and profit maximisation (Burns, and Scapens,
2007). This method helps you to choose the product’s pricing system.
Advantages and disadvantages of different planning tools
Variance analysis: while you are planning a budget you try to stick to the budget, but you
cannot make it right every time. Even most of the times you may exceed the budget or spend less
than the budget. It is very rare to match the exact budget. Variance analysis does the analysis of

gap between the expected budget and actual outcomes. It analyses the reason behind the different
outcomes.
Advantages:
 This methods increase positivity of income and cost.
 It flexes the budgetary framework so that it can be changed at any time
 When the outcome is different this method prepares the organisation to adapt with the
situation.
Disadvantages:
 This method consume huge amount of time which is sometimes not worthy.
 Not appropriate for the small and medium organisation.
 It is unnecessary if the organisation cannot deal with adaptability.
Responsibility Centre: Through this planning tool the employees of the organisation is aware of
their responsibilities and duties towards the organisation. They are aware of what will happen if
they don't do their work properly within given time.
Advantages:
 It raise awareness among employees
 Helps to divide work among the employees
 Helps to reduce duplication of work and save time
Disadvantages:
 Sometimes it can have a negative impact upon the employees. Every employee cannot
take the pressure of responsibility.
 Tough to apply in small organisations.
Monetary Planning: Financial arranging is the way toward allotting the budgetary assets
important to accomplish the set objectives. The focal points and impediments of budgetary
arranging include:
Advantages:
 Preparing of time to make sure about assets for the future needs.

 2. Permits association to get by during the hours of downturn.
 3. Gives data with respect to the necessities of every individual objective.
Disadvantages:
 As future is dubious, budgetary requirements may change enormously after some time.
 Associations will in general be over driven about their objectives which is then hard to be
subsidized.
 Absence of accessibility of information results in not having the option to estimate future
needs.
Budgetary Control: The cycle of budgetary control is concerned about setting explicit spending
plans and go along the money related and execution objectives with the consequences of the
association (Parker, 2012).
Advantages:
 Execution is diverted along the lines of the objectives that are feasible
 It builds efficiencies of the association and empowers it to utilize its budgetary assets
well.
 Since spending represents a requirement, association attempts to diminish costs from
numerous points of view as could reasonably be expected.
Disadvantages:
 Appraisals might be incorrect, and less spending plan might be given to a task than what
is fundamental.
 Designating more financial plan than should be expected may bring about wasteful
utilization of financial plans.
Income Analysis: This examination is worried about the inflow and surge of money related
assets that is brought about by different hierarchical capacities.
Advantages:
 Having the option to anticipate the future incomes from different exercises.
 Plan for the future and keep up adequate money assets within reach

 Permits the association to take care of their gatherings to prop the association up.
Disadvantage:
 Doesn't generally show the really pay that is created by tasks.
 Human mistake may make it show wrong information.
Analyse the use of different planning tools and their application for preparing
and forecasting budgets.
Analysing the planning tools in the context of Coca-Cola is given below:
Variance analysis: One of the prime planning tools used by Coca-Cola to forecast is variance
analysis. This is the planning tool that has the objective of budgetary control. In this tool various
costs are assigned to various entity and then actual cost is compared with the budgeted costs. If
there is any variance or difference visible required actions ae taken by Coca-Cola for budgetary
control.
Standard costing: This planning tool is also used by Coca-Cola and it ensures a standard
costing system through which the organisation can cut excess cost and maximise productivity
and profit. It ensures the proper use of resources and make sure that no resources should go
waste. Thus it cut the unnecessary cost and increase profitability for Coca-Cola.
Ratio analysis: This technique measures the ratio of different elements of Coca-Cola to integrate
an element with another and analyse the current condition of the organisation. For example,
current asset analysis, through this organisation can see how much cash they have in the
organisation according to accounts payable. It indicates that if Coca-Cola has the ability to pay
their current loan. Thus the quick ratio, return on capital employed, return on assets, return on
equity give a view of organisation’s current condition.

Compare how organisations are adapting management accounting systems to
respond to financial problems.
Business organizations often face various financial problems and they solve those problems by
using various tools of management accounting systems. Here the comparison between Coca-Cola
and PepsiCo is provided below regarding how they are adapting management accounting
systems to re4spond to financial problems:
Benchmarking: It is one of the pieces of the board bookkeeping frameworks which are utilized
in tending to monetary issues. In benchmarking one organization accepts another organization's
exhibition as benchmark which is best in the area. Coca-Cola produces soft drinks and to
guarantee what ought to be their nature of their items they select Red Bull items as their
benchmark. How Redu Bull is utilizing cost authority guides Coca-Cola to decrease their
expense as well. Then again, PepsiCo is also a soft drink manufacturer and they accept Britvic as
their benchmark which is outstanding amongst other soft drink manufacturer in the world.
PepsiCo attempts to accomplish the technique of Britvic how they are utilizing their stock
framework effectively to decrease waste and creation variance.
Key Performance Indicators: Business associations select a few pointers, for example, benefit,
misfortune, stock, income and deals as prime execution markers and in the event that they can
meet those markers they are allowed to be effective. Coca-Cola faces issues of estimating their
effectiveness in deals and that is the reason they have chosen Sales and income as their
exhibition pointers that will inform them as to whether they are proficient or not. Then again,
PepsiCo was confronting issue of profitability and to build their efficiency they chose benefit and
misfortune as their KPI. In the event that they can build their benefit they can be said a beneficial
or, in all likelihood not gainful (Olive, 2012).
Balanced Score Card: A precise vital administration apparatus that by and large perceives and
improves the elements of an association is known a balanced scorecard. This arranging device is
utilized predominantly to make key arrangement for an association Coca-Cola use balance score
card to guarantee they are taking right choice with respect to their methodology. For instance,
they couldn't expand their net revenue all things considered they utilized offset score card with

the end goal of taking right choice with respect to what kind of procedure they should take. As
per the result of equilibrium score card they went for item improvement methodology that let
them inspire the overall revenue that previously. Then again, PepsiCo utilized adjusted score
card to take choice what kind of hardware they should purchase among five organizations. The
greatest scorer elective is picked by the association which will give them benefit and
achievement.
The above discussion shows how two organizations or brands Coca-Cola and PepsiCo adapting
different methods of management accounting systems to address financial problems.

Analyse how, in responding to financial problems, management accounting
can lead organizations to sustainable success.
Organization like Coca-Cola can gain sustainable success by addressing or responding financial
problems with the help of using planning tools. Here is the analysis is provided below:
Variance analysis: This is the planning tools that are so effective in making manufacturing
process of Coca-Cola that the organization can address financial problem like gap between actual
performance of the organization and targeted performance. This let Coca-Cola to sustain their
success by making consistent in their performance.
Standard costing: This planning tool is also used by Coca-Cola and it ensures a standard
costing system through which the organisation can cut excess cost and maximise productivity
and profit. So it addresses problems like low productivity of Coca-Cola and ensures
sustainability of the organization.
Ratio analysis: This technique measures the ratio of different elements of Coca-Cola to integrate
an element with another and analyse the current condition of the organisation. It addresses
financial problems like profitability of a project and making accurate decision for the
organization.
Critically evaluate how planning tools for accounting respond appropriately
to solve financial problems to lead organizations to sustainable success. Use
examples from your chosen organization.
As we as of now have examined about the arranging devices and clarify how my association and
Coca-Cola is utilizing them. The diverse arranging devices like planning, venture examination or
assessment, standard costing and proportion investigation encourages the association to take
choice about various basic circumstance. These devices are helping the association to stay up
with the current market and old their position. For instance Coca-Cola is persistently giving
better support of the entire world utilizing administrations bookkeeping frameworks. So as
opposed to finding a lot more virus drinks Coca-Cola is still presently number one refreshment
drinks. They are holding their position and guaranteeing their maintainability (Olive, 2012). So

unmistakably by utilizing distinctive arranging instruments and the board bookkeeping
frameworks viably an association can maintain their business adequately and guarantee
reasonable achievement.

Conclusion
Through thus report we can see the importance of management account and management
accounting systems and management reporting. Financial management is mainly used for
external users where the management accounting is for internal users through which any
employees of the organisation can have the idea about the current situation of the organisation.
Through different management accounting tools and techniques an organisation can increase its
efficiency, productivity and maximise profit. These tools are also used for reducing cost. Overall
management accounting make an integration within every departments of the organisation and
help the organisation to take the right decision to reach organisational goal.

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