Management Accounting and Budgetary Tools for Financial Management

This report explains the principles of management accounting and the importance of integrating management accounting systems within an organization. It also covers different methods and techniques used for management accounting reporting, advantages and disadvantages of budgetary tools, and how organizations adapt management systems to respond to financial problems. The report includes a comparison of Tesco and Sainsbury's and their financial management strategies.

UNIT 5 ASSESSMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Explaining the principles of management accounting and the importance of integrating
management accounting systems within an organization............................................................3
2. Different methods and techniques used for management accounting reporting .....................4
3. Advantages and disadvantages of budgetary tools..................................................................6
4. How organizations adapt management systems in order to respond to financial problems....7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................1

INTRODUCTION
Management accounting is defined as the practice of measuring, analysing, identifying,
interpreting and communicating the financial information and resources to managers in order to
achieve the organizational aims and objectives. It is used by the internal team of the organization
with an objective to use this statistical data in order to take better decisions and ensure effective
decision making of the organization. The current report will be based on Eastern Engineering
Co. Ltd. which is a successful medium- sized enterprise in the manufacturing sector. It will
explain the principles of management accounting and the importance of integrating management
accounting systems, different methods and techniques used for management accounting,
advantages and disadvantages of budgetary tools and how organizations adapt management
systems to respond to financial problems.
MAIN BODY
1. Explaining the principles of management accounting and the importance of integrating
management accounting systems within an organization
Principles of management accounting
The management accounting principles are developed in order to serve the main
requirements of internal management, improve business processes, decision making, customer
value and capacity utilization which are needed to achieve corporate goals of an organization
(Abednazari and et.al., 2018). They are designed to help businesses in managing the chaotic
accounting processes and promote long term profitability of the organization. These principles
are as follows:
Designing and compiling:
This principle explains that the accounting records, information, statements and all other
evidence of results should be properly compiled and designed to meet the needs of specific
problem or a particular business. The management accounting system is designed in a way to
present relevant data in order to solve a particular problem. Also, the accounting information can
be change and adopted by the company to meet the requirements of the management.
Management by exception:
The principle of management by exception is followed when the information is presented
to the management. It means that the standard costing techniques and the budgetary control

system are being followed in the management accounting system. The actual performance is
compared with the pre-determined one for finding the deviations in the operations,.
Control at source accounting:
According to this principle the costs are best controlled where they are incurred. The
performance of the individual workers, utilization of services and details of materials such as
repair and maintenance, power, machine, vehicles etc. are prepared in a form of qualitative and
quantitative information. Control can be effectively exercised in this way over the employees and
service providing devices.
Importance of integrating management accounting systems within organizations
Management accounting can be used in long term and short term, decisions considering
the financial health of the company. It helps the managers to make operational decisions which
are intended to help in increasing the operational efficiency of the company. For example, it
saves times and cost of the organization which was a major problem in the traditional book
keeping method of accounting. For example, It also helps the organization to make long term
decisions for proper investment ideas by providing real time data which allows the organization
to track the exact amounts of money in the transactions (Căpușneanu and et.al., 2020). For
example, it provides the organization with high flexibility by using web based accounting
software gives convenience to the managers to track the crucial information of the organization
and perform tasks from anywhere in the world.
2. Different methods and techniques used for management accounting reporting
Management accounting reports are important documents which are used for regulating,
planning, measuring performance and decision making. These reports are continuously generated
throughout the bookkeeping and accounting period according to the needs of the organizations.
They should be clearly crafted by the management as the critical decisions depends on the
authenticity of these reports. Managers analyse these reports in order to highlight certain patterns
and converting them into useful information (Taylor, 2020). There may be certain methods and
techniques used for reporting management accounting.
Methods
Budget Report:

They are critical in measuring the performance of the company and are generated for
small businesses and according to departments in large organizations. Different organizations
creates an overall budget to examine the grand schemes of the business. The budget is usually
prepared in the basis of the previous experiences of the company which cater the unforeseen
circumstances which may arise. It contains all sources of expenses and earnings of the company
which can guide the managers to offer better employee incentives, renegotiating terms and cut
costs to the suppliers and vendors.
Cost Report:
Management accounting includes computing the costs of the articles that are
manufactured including all the raw material costs, labour, overhead or any other specific costs.
The cost report offers a summary of the information of to the totals of the expenses divided by
the costs of product produced. Profit margins are monitored and estimated with the help of this
report by getting an idea of the costs that went into procurement and production of the articles.
Account Receivable Ageing Reports:
These reports are vital for companies which rely on heavily in extending credit for
businesses. They include breaking down the remaining balances of clients into specific periods
and allows the managers in identifying the issues and defaulters in the collection process of the
company (Chong and Khudzir, 2018). If there are more defaulters for the company, it may
require a full transformation to strengthen its credit policies as cash flows is important for
operations of the business.
Techniques
Margin Analysis:
This technique is concerned with the benefits of optimization of production. It is one of
the most important techniques in management accounting as it includes calculating the break
even point that determines the sales mix of products of the company.
Capital Budgeting:
It includes the analysing the information which is required to make important decisions in
relation to capital expenditures. In capital budgeting analysis, the managerial accountants
calculate the internal rate of return (IRR) and net present value (NPV) in order to help managers
to take crucial new capital budgeting decisions.

Inventory valuation and product costing:
The process involves identifying and analysing the actual costs which are associated with
the inventory and products of the company (Javed and Malik, 2021). It implies the assessment of
the direct costs in relation to the cost of goods sold (COGS) and allocation and calculation of the
overheard costs of the organization.
3. Advantages and disadvantages of budgetary tools
Budgetary tools are special methods which are designed in order to help organizations or
individuals in the management, altering and controlling of their budget. They are convenient for
businesses to create effective cash flow reports, profit and loss statements and more to forecast
future revenues with ease. These tools are as follows:
Activity based budgeting:
This tool is a top-down budgeting approach that determines the amount of inputs that are
required in order to support the outputs or targets which are decided by an organization. It helps
in reducing the expenses of the company by eliminating the amount which is required for
unnecessary activities. It helps in saving the company from the affects of inflation in the
competitive industry.
Advantages:
It helps in decreasing the cost of production for the company and provides a better
understand and expertise of the budgeting process for the organization. It also helps in making
budgeting decisions for the company which provides flexibility in functioning of the company.
Disadvantages:
It is very time-consuming and lengthy process which requires historical data and future
expectorations which are unrelated to the current scenario. It requires a large and talented team
for management of the resources (Griffin, 2021). The short term goals of the company may be
compromised sometimes in order to achieve long term benefits.
Cash based budgeting:
This tool that helps an organization to manage their cash inflow and outflow. It is
prepared in advance for the appropriate allocation of the cash in the business. So, no ideal cash
remains in the business (Zahid and Vagif, 2020). It provides for all the cash receipts and
expenses of the company.

Advantages:
It helps organizations to avoid debts as it provides in advance about all the cash outflows
of the company. It also eliminates the waste related to the resources of the company. It helps in
identifying the financial position of the organization which helps the company to increase its
profitability.
Disadvantages
It may have a threat of theft of the cash amount of the organization as cash is one of the
most liquid asset of organizations (Amran, 2020). It is also related in forecasting the future cash
flows with the help of past cash flows that are not reliable.
Zero- based budgeting:
This is one of the most commonly used budgetary tool which assumes that all the
department budgets must be rebuilt from scratch. Zero-based budgeting is very strict, aiming at
avoiding all the expenditures that are not considered as essential to the companies operations
(Stone, Cox and Gavin, 2020). This approach is highly useful when there is urgent need for
containment of cost .
Advantages:
It helps an organization in allocating their resources effectively and efficiently by reducing the
cost of the operations. This tool also helps in improving the coordination among the employees
of the company which helps in improving the accuracy of the company.
Disadvantages:
It is a highly intensive and time-consuming process for organizations to asses. It needs high
training for the preparing the budget by using this tool and it requires expert employees for
solving the tough tasks.
4. How organizations adapt management systems in order to respond to financial problems
Financial problems are the situations in which an organization is in a difficulty to manage
its capital and expenses. There are many financial problems for the organizations which
generally are due to the mismanagement of the resources of the organization. These problems
arise due to insufficient accounting practices of the organization which increases the spending of
the company (Kharlamova and et.al., 2020). The success of failure of a business depends upon
its cash flow and has a major influence over the profitability of the company. The management

systems are integrated sets processes and tools which a company can use to manage its business
structure. By applying an effective management system an organization can increase its
productivity and achieve sustainable growth and resolve the financial problems.
Comparison of Tesco and Sainsbury's
Sainsbury's is facing a cash flow crisis due to the inflation going around in the industry.
The company might be experiencing financial issues due to this factor and have a negative
impact on the sales and profitability of the business. The company have used forming cash
budget techniques in order to manage the financial problem that arise in the company (Ngo,
2021). It has used various benchmarking tools for management of its accounts. The company
may also use balanced scorecard to analyse the working of the company. The monitoring and
controlling methods may also be used by the business to get an idea of the progress of the
processes applied.
In comparison to Sainsbury, debt rate of Tesco is increasing on a daily basis that has been
the reason for an increase in the creditors of the company. Management accounting helps in
handling internal management of the company by setting benchmarks and by adopting different
managerial accounting techniques for the company (Schermerhorn Jr, Bachrach and Wright,
2020). By preparing budget of the company, it will provide clear insight of the financial position
of the company to the management. It will help in extending the credit limit of the creditors and
increasing the profit margin of the company. This will help in enhancing the growth of the
company and improving the financial condition of the company. By adopting the six sigma and
total quality management the company may have reduced its cost of operation of the company.
CONCLUSION
On the basis of the above report it has been concluded that management accounting has
been beneficial for the organization to improve the efficiency of the company. It has helped the
organization in performing the business operations effectively. The company have used various
methods and techniques for management accounting reporting which helped the company to find
the issues in its existing structure and make effectiveness changes in the business. Budgetary
tools have helped the organization in managing its expenses and increasing the profitability of
the organization. It has also helped the company in managing the monitoring and controlling the
processes of the organization.

REFERENCES
Books and journals
Abednazari, M. and et.al., 2018. A Critical View of Global Management Accounting Principles.
International Journal of Finance & Managerial Accounting. 3(9). pp.17-27.
Amran, A., 2020. Influence of Decentralization and Management Accounting System
Managerial Performance Against. ATESTASI: Jurnal Ilmiah Akuntansi. 3(1). pp.63-73.
Căpușneanu, S. and et.al., 2020. Management accounting in the digital economy: evolution and
perspectives. In Improving business performance through innovation in the digital
economy (pp. 156-176). IGI Global.
Chong, V.K. and Khudzir, N.F., 2018. The effect of mutual monitoring and need for
achievement on budgetary slack in a team-based environment. In Advances in
accounting behavioral research. Emerald Publishing Limited.
Griffin, R.W., 2021. Management. Cengage Learning.
Javed, S. and Malik, M., 2021. The propensity of risk-taking and financial efficiency: Exploring
the role of management accounting system: Evidence from the manufacturing sector.
Cogent Business & Management. 8(1). p.1954490.
Kharlamova, O. and et.al., 2020. Management accounting using benchmarking tools. Academy
of Accounting and Financial Studies Journal. 24(2). pp.1-7.
Ngo, Q.H., 2021. The impact of market orientation on small businesses’ performance in
Vietnam: The mediating effects of the management accounting system. Entrepreneurial
Business and Economics Review. 9(3). pp.59-72.
Schermerhorn Jr, J.R., Bachrach, D.G. and Wright, B., 2020. Management. John Wiley & Sons.
Stone, R.J., Cox, A. and Gavin, M., 2020. Human resource management. John Wiley & Sons.
Taylor, R., 2020. Budgetary Control and Standard Costs. In The Accountant’s Magazine (pp.
129-137). Routledge.
Zahid, N.A. and Vagif, L.M., 2020. ROLE OF MANAGEMENT ACCOUNTING IN THE
ORGANIZATION. Economic and Social Development: Book of Proceedings. 3.
pp.367-372.