Management Accounting: Benefits, Methods, Techniques and Tools

This report focuses on the management accounting and how it helps the management to make long term and short term decisions. It covers benefits, methods, techniques and tools used in management accounting. The report discusses the benefits of management accounting such as planning operational activities, taking important decisions, monitoring performance, increasing productivity and providing better services to customers. It also covers different methods used to prepare management accounting reports such as marginal costing and constraint analysis. The report further discusses management accounting techniques used to do analysis of financial information and planning tools used for budgetary control purposes. Finally, the report covers how businesses are using management accounting for solving financial issues of the organisation and how it leads to the sustainable success of the organisation.

Management
Accounting

Table of Contents
Management Accounting.................................................................................................................1
Introduction......................................................................................................................................3
P1.....................................................................................................................................................3
Management Accounting.................................................................................................................3
It has many benefits such as :.....................................................................................................3
P2.....................................................................................................................................................5
Different methods used to prepare management accounting reports are as follows :.................5
M1....................................................................................................................................................6
Benefits of management accounting system in context to organisation :...................................6
P3.....................................................................................................................................................6
Cost Cards of November and December month.........................................................................6
Absorption costing .....................................................................................................................7
Marginal costing .........................................................................................................................7
Flexible budget of November and December.............................................................................8
M2....................................................................................................................................................8
Management accounting techniques used to do analysis of financial information:....................8
P4.....................................................................................................................................................9
Advantages and disadvantages of planning tools used for budgetary control purposes :..........9
M3..................................................................................................................................................12
Application of planning tools in preparing and forecasting budgets:.......................................12
P5...................................................................................................................................................12
Businesses are using management accounting for solving financial issues of the organisation :
...................................................................................................................................................12
M4..................................................................................................................................................14
How management accounting leads to the sustainable success of the organisation.................14
Conclusion :...................................................................................................................................15
References :....................................................................................................................................16

Introduction
This report focuses on the management accounting and how it helps the management
to make long term and short term decisions. It is the systematic process of collecting,
identifying, summarizing, analysing and communicating the information with the users. The
main objective behind preparing these financial reports is to help the top level management in
planning future corporate strategies. Moreover, it helps to prepare the plan and control the
operations of the concern. By using the management accounting techniques actual
performance is compared with the standard one to figure out the variations and provide the
best services to the customers.
P1
Management Accounting
It is the process of preparing financial reports that would help the management to make
decisions for long term purposes. In this businesses financial transactions are recorded,
classified, summarised, analysed and communicated to help the managers in proper utilization
of resources and plan future corporate strategies. It has various benefits right from taking
important decisions to asset management.(Aslanertik and Yardımcı, 2019 ) Moreover, this
assists in revenue management, cash management, turnover management and so on. This
helps the management in planning the activities of the operations in order to make profits.
It has many benefits such as :
• Planning the operational activities – In management accounting all the monetary and
non monetary information is presented in front of top level management which helps
them to forecast future conditions of the business and do the in depth analysis of the
financial position of the organisation performance. Therefore, it assists managers to
make decisions as per the reports provided by them.
• Taking important decisions – Since, management accounting tools are used to figure
out the actual position of the business concern as well as it provides financial data in the

form of charts, graphs, tables and others which helps the management to get actual
view of the concern and take decisions accordingly. For instance, if the product is not
doing good in the market place managers will take decisions to overcome all the
constraints and frame strategies to avoid any kind of future losses.(Paul, 2020)
• It helps to monitor the performance on regular basis : As these financial reports helps
the organisation to measure the performance on regular basis. In this they uses various
tools of costing like standard costing which helps to find out the deviations. As per this,
management will find out the variations and will take accordingly.
• It helps to increase the productivity of the concern : In management accounting, top
level management set the standards for all the departments and later find out the
deviations or all the weak areas in order to improve the efficiency of the business
concern.
• Better services to customers : After doing the in depth analysis of costs and revenues
management take decisions regarding the cost reduction, quality of products and
others. In this they focuses on providing the best services to the customers by increasing
the quality of goods and reducing their cost. It helps to control the prices of the
products because in this management uses cost control devices to put control on all
kind of extra costs which ultimately is beneficial to customers and raises the profitability
of the organisation.(Batkovskiy and et. al., 2017)
P2
Different methods used to prepare management accounting reports are as follows :
Managerial accountants has to translate all the financial data into useful information
that can help top level management to take all the decisions carefully. The goal is to provide
detailed information with regard to company' s operating activities such as how many line of
products they are offering , how much costs businesses incur and others.
• Marginal costing method : It focuses on calculating the changes in total cost when the
quantity produced is increased by one. In this fixed cost is same, while variable cost

keeps on changing as per the production. (Kumar, Stauvermann, Patel and Prasad,
2018)It is useful for profit planning as it showcases profits at different level of
production and sales. In addition to this, this technique is used to make all the
important decisions with regards to price of products, export decisions and so on.
Various techniques of marginal costing used are P/V analysis and break even point in
order to boost its profits.
• Constraint analysis : as this technique is used to find out where the company lacks. So,
by using this tool management accountant can figure out all the inefficient areas of the
business and how it is negatively impacting revenues and profits of the organisation.
(Rachlin, 2019)
• Capital budgeting : In this, accountants calculate net present value and inIntroduction
• This report focuses on the management accounting and how it helps the
management to make long term and short term decisions. It is the systematic process of
collecting, identifying, summarizing, analysing and communicating the information with
the users. The main objective behind preparing these financial reports is to help the top
level management in planning future corporate strategies. Moreover, it helps to prepare
the plan and control the operations of the concern. By using the management
accounting techniques actual performance is compared with the standard one to figure
out the variations and provide the best services to the customers.
M1
Benefits of management accounting system in context to organisation :
Management accounting means using the summarize financial records for multiple
purposes. It helps the management to use the financial information for its benefits and execute
business operations effectively and efficiently. There are various benefits such as it helps the
organisation in taking all the important decisions with regards to business operations. In this
various techniques are used to get in depth analysis of financial information. Moreover, it is an
ongoing process to plan the activities of the organisation. For instance, if the sales goes down

due to any reason, in that case sales manager can instruct its team to figure out what all areas
need to be rectified to improve its operations. It helps them to forecast the problems on early
basis and take appropriate actions. Besides this, it allows company to focus on all the core areas
which lacks the efficiency to produce profits. So, this allows them to take strategic decisions
with regards to continuation or closure in order to boost up its profits by increasing the market
share.
P3
Cost Cards of November and December month
Particulars November (£) December (£)
Sales
less : cost of good sold
Direct material
Direct labour
Fixed overheads
Profits after considering all the
cost at the month end
700000
100000
150000
250000
200000
560000
100000
150000
250000
60000
Absorption costing
Particulars November (£) December (£)
Turnover 700000 560000
Less : Cost of goods sold
Direct material (100000)
Direct labour ( 150000)
Fixed overheads (250000) 500000
Less : Closing stock (2000*50) 400000
Gross profit 200000 160000
Less : Under absorption (25*2000) 0 50000
Net profit 110000

Under absorption : In this, fixed cost is considered to calculate absorption cost. Later, closing
inventory is multiplied with the absorption cost rate. So, in this way absorption cost is
calculated.
Marginal costing
Particulars November (£) December (£)
Turnover 700000 560000
Less : Cost of goods sold
Direct material (100000)
Direct labour ( 150000)
Fixed overheads (250000) 500000
Less : Closing stock (2000*50) 100000
400000
Gross profit 200000 160000
Flexible budget of November and December
Particulars Standard Actual Variances Variance %
Sales 100000 122000 22000 22.00%
Less : cost of good sold
Direct material 50000 60000 10000 20.00%
Direct labour 25000 28500 3500 14.00%
Variable overhead 12500 15000 2500 20.00%
Gross profit 12500 7500 -5000 -40.00%
Fixed overhead 10000 11000 1000 10.00%
Net profit 2500 -3500 -6000 -240.00%

M2
Management accounting techniques used to do analysis of financial information:
As far as management accounting is concerned, financial reports are analysed deeply by using
certain tools and techniques for the purpose of decision making. In this cost and profit
statements are prepared to ascertain how the business is performing. Cost statement is
prepared by considering turnover of the period. Later, all the expenses to produce those goods
are considered to come down to the actual results. Hence, this helps whether the company is
having profits or losses from its operations. Other than this, marginal costing method is used to
find out the additional cost incurred due to the production of additional units in the
organisation. This helps to boost the productivity and increase the profit levels of the business
concern. It takes into consideration the variable cost, which changes as per the production
levels. Furthermore, it is useful in profit planning as it showcases profit levels at different
production levels. As well as it helps in taking various decisions with regards to fixing selling
price, make or buy decisions and so on. In the above numerical, marginal cost is calculated by
taking all the two elements namely, sales and cost of producing those goods. This is useful in
calculating profits and taking decisions as per the prevailing situations. On the other hand,
profit statement of absorption costing is prepared to ascertain the financial position of the
business concern. It is a full costing method which includes all type of costs whether its direct or
indirect in manufacturing a product of the concern. There is a difference between both the
costing methods such as, in marginal costing only variable cost is taken as product cost while in
absorption costing both fixed and variable cost are taken for calculating product cost. So, these
techniques helps in preparing the cost and profit statements to take all the important decisions
of the organisation.
P4
Advantages and disadvantages of planning tools used for budgetary control purposes :
Budgetary control is a technique used by the organisations to compare its actuals with
standards to improve the performance of the organisation. In this revenues and costs are

compared with the standards and it helps to find out the variations. These deviations helps to
adjust the performance and helps to control all kind of extra cost of the business concern.
Techniques are as follows :
• Variance Analysis : In this budgets are prepared for all the departments. Further, a
comparison is done between the standards and actuals to figure out the variances.
These variances are of two types favourable and unfavourable. If the standard are more
than the actuals it is denoted by favourable condition which means business is
performing well. Whereas, if the actual cost is higher than the standards, it denotes
some inefficiencies in performing the operations. This helps in controlling the cost of the
operations in order to increase its productivity.(Ilg, Scope, Muench and Guenther, 2017)
Advantages :
Variance analysis helps to identify the areas where extra cost is incurred and taking actions to
rectify the overrun costs.
It also helps to identify whether standard cost decided is reasonable or not.
Disadvantages :
The major drawback of this technique is it takes long time to examine the effects of variances
due to corrective actions are postponed.
• Responsibility accounting : it is a technique in which three centres are created namely
cost centre, profit centre and investment centre. All these centres are like departments
of the organisation and employees are classified accordingly and their responsibilities
are fixed for each individual. Later their performance is measured on the basis of their
decided responsibilities. (Riley and Yen, 2019)
Advantages:
It helps to take decisions regarding the promotion and demotion of employee on the basis of
their performance.
It promotes decentralization because in this work is divided into various departments such as
finance, marketing , production and others. So, delegation of tasks helps to manage
organisation activities efficiently.
Disadvantages:

Possibility of Employee Conflicts : Due to strict supervision and control in the organisation,
employees may feel anxiety which will negatively impact their performance and they may not
willing to work. This not only decreases productivity levels but also reduces the profits of the
business concern.(Jorge, de Jesus and Nogueira, 2019)
• Adjustments of funds : As this technique of budgetary control helps in proper allocation
of funds. In this top management decides the fund allocation on to projects so that
there is no misuse of money. For instance, if organisation has allocated excess funds on
one project and another project need funds. So, the surplus funds of first project is
adjusted on to another project.
Advantages :
It helps to maintain financial books in a systematic way and matches revenues with the
expenses. So, here adjustment of fund becomes easy on to various projects in order to
generate more profits.(Mahmoudi, Jodeiri and Fatehifar, 2017)
Disadvantages :
It requires a lot of adjustment with regards to capital employed which will definitely affect the
profits of the business concern.
• Zero based budgeting : In this, budget of next year is taken as zero which is possible
only when expense will be equal to revenue. And in case, if there is any excess amount it
will be adjusted.
Advantages :
This technique helps in controlling each and every penny spent during the year under various
departments.
It is based on current economic situation rather than considering the past situations. As well as
it helps businesses to conduct operations systematically in the business concern.

Disadvantages :
It is very time consuming process and requires trainings of the whole staff. This will increase the
work load of the management.
It also gets impacted due to changes in the business environment because these changes will
impact the financial data of the concern.
M3
Application of planning tools in preparing and forecasting budgets:
Budget is an effective tool that helps to plan future corporate strategies by taking consideration
into past. It is all about thinking what all the organisation wants to accomplish and plan the
activities accordingly. Moreover, it helps in preparing financial programs for generating and
allocating resources to accomplish the goals of the business concern. It is a potential method of
calculating expenses and incomes and take decisions accordingly. For instance, if organisations
want to conduct analysis of financial statements they can do it by using ratios or through
comparative trends, graphs, diagrams and others. For this, cash flow and fund flow statements
are also useful in checking the cash inflows and outflows of the enterprises to forecast the
current and future financial conditions. Other than this, for conducting the cost analysis, cost
statements are prepared and various other techniques are used such as, standard costing,
marginal costing, absorption costing and others to calculate cost and ascertain profits. Hence,
these planning tools are used for doing the cost or profit analysis in order to generate more
profits.
P5
Businesses are using management accounting for solving financial issues of the organisation :
• Management accounting provides financial and statistical information to the internal or
external users to get financial information about the business concern and take
decisions accordingly. This includes the cash available with the business concern,
turnover generated, creditors and debtors of the organisation and others.

• It will help businesses to understand their overall cost of production. It allows them to
see how the business is doing and what all improvements are needed. Besides this, it
will give them complete information about cost of various departments which ultimately
help to reduce the cost and increases the productivity of the organisation.
• It is helpful to track the cash flows of business : It allows businesses to monitor how
much cash flows in the business concern. This allows us to see previous profit trends
and do comparisons accordingly. It helps to devise future corporate strategy after
considering all the uncertainties. In addition to this, it helps businesses to do the
comparison of profits from its competitors.
• Reduces the tax liability : as management accounting helps businesses to monitor their
all expenses and incomes. These records helps the management to make strategic
investment in the profitable projects which will ultimately reduce the tax liability and
boost the profits of the organisation.
• It also helps in constraint analysis : as financial accounting focuses on maintaining books
of accounts to ascertain its profits and losses of the enterprise. While, management
accounting helps identifying problems that affect the overall efficiency of the business.
So, this analysis helps to find all the weak areas of the concern with the purpose of
improving them.
• These management accounting techniques helps to resolve the financial issues of the
business concern. In this various calculations are done with the objective of figuring out
the current and future uncertainties. Furthermore, in financial accounting records are
maintained to check on the financial status of the company. Whereas, management
accounting helps to get in depth knowledge of the current happenings of the
organisation.

M4
How management accounting leads to the sustainable success of the organisation.
All the businesses whether small or large requires to use management accounting to enhance
the revenue and competitiveness of the markets. So, it becomes utmost important for the
managers to have complete financial and non financial information for the purpose of decision
making. Furthermore, this helps managers to formulate plans according to the information they
have. Doing the deep analysis of financial statements will help managers to plan the action
which leads to the success of the organisation. It is done for variety of purposes such as in
depth analysis of cost. It allows businesses to determine the actual cost of product by including
all the expenses for manufacturing it such as direct material, direct labour, variable overheads
and so on. Not only this, but it also helps in making production related decisions effectively for
instance, if company wants to produce any unit, they will decide whether to produce it by own
or hire it from some where else. So, as per this management reaches to the best decision which
is profitable for the concern and would be able to avoid any type of money wastage. Besides
this, it helps the business concern to adjust on to some of the production lines or hire it from
the external supplier . Additionally, it helps organisation to plan the future as per the current
situations by following the financial patterns of the operations. It also assist businesses when to
start the expansion process to have more profits. It requires money, time and all the resources
effectively in order to boost its production. It also helps managers to create effective budget
by analysing the previous trends, situations and investments. As well as, it assist managers in
allocating funds after doing the keen analysis of the department to function exactly they have
planned. Hence, it helps organisation to use its resources effectively in order to generate more
profits as compared to others without compromising the quality of products or their
marketability.
Conclusion :
As per the above study conducted, management accounting is helpful for managers in devising
future corporate strategies. In financial accounting reports are prepared to ascertain profits and
losses of the business concern. Whereas, in management accounting, managers use techniques
such as standard costing, marginal costing, budgetary control and others . Moreover, it helps in

resolving financial issues of the concern and it assist managers in taking long term and short
term decisions with the objective of earning profits. These management accounting techniques
are used to help management in solving all the issues which become obstacles in the growth of
concern.

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