Application of Management Accounting in a Business Context

This report discusses the principles and methods of Management Accounting in a Business Context. It covers critical evaluation of Management Accounting systems, benefits of the Management Accounting systems, principles of Management Accounting and different methods used for Management Accounting reporting, preparation of income statements using marginal and absorption costing, advantages and disadvantages of budgetary planning tools, response of management to financial problems, and how Management Accounting helps in achieving sustainable success. The report is based on the perspective of MORRISONS, a global retailer.

Application of
Management
Accounting in a
Business Context

Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Critical Evaluation of Management accounting Systems............................................................3
Benefits of the Management Accounting systems.......................................................................3
Principles of management accounting and different methods used for management accounting
reporting.......................................................................................................................................4
Preparation of income statements using marginal and absorption costing..................................5
TASK 2............................................................................................................................................8
Advantages and disadvantages of budgetary planning tools.......................................................8
Response of management to financial problems.......................................................................10
How Management accounting helps in achieving sustainable success.....................................11
how organisations adopt Management systems.........................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting, sometimes known as managerial accounting, appears to be a system
that provides financial tools and assistance to decision-makers. The sole distinction between
management accounting and financial accounting is that management accounting is used
primarily by the company's internal workers. Finance management provides accounting records
and statistics with business unit heads throughout this procedure, such as invoices and corporate
balance statements. The purpose of management accounting is to use statistical data to make
more accurate and better judgments regarding the company, its operations, and its progress
(Cooper, 2017). This study is provided from the perspective of MORRISONS, a global retailer.
Furthermore, the report aids in understanding management accounting and the key requirements
of various management accounting systems. In addition, the report will cover various planning
tools and accounting approaches for management accounting. Finally, the study will discuss the
benefits and drawbacks of various planning systems used for budgetary control.
TASK 1
Critical Evaluation of Management accounting Systems
Managerial accounting takes key decisions based on a variety of accounting and financial data
that impact the organization's growth. It goes through a number of accounting procedures in
order to provide valuable and accurate information to the management authorities so that they
may better understand and analyse business operational metrics. Managerial accountants
examine data relating to the cost of goods sold and the company's revenue from sales of goods
and services. Cost accounting is a subset of management accounting that analyses the fixed and
variable costs of each manufacturing stage to determine and capture overall production costs
(Daoud, and Triki, 2013). The method of management accounting is used by monetary
administrators to acquire and transmit precise as well as solid data that is used by the chiefs to
oversee everyday activities in a coordinated manner. In addition, management accounting aids in
the interpretation and conversion of financial data into useful data, which aids directors in
determining effective navigation.
Benefits of the Management Accounting systems
Management accounting is referred to as a distinct type of accounting from monetary
accounting. It is primarily concerned with providing financial information that assists

administrators in making decisions. This simply means that it goes beyond the tracking of daily
money transfers and instead focuses on corporate forecasting and long-term decision-making.
The crucial role of management accounting is to assist the directors in calculating the
contribution cost by describing all data related to expense, benefit, and market elements.
The management manager also assists in determining the lifetime of things as well as the
appropriateness of new contributions (Dillard, 2013). The management accounting department
is in charge of gathering the organization's financial data and preparing reports for supervisors to
use on a confidential basis.
Management accountants produce comprehensive technical reports with easy
interpretations in which he says the facts of financial statements, so that company's management
officers grasp what's in the financial statement and how they'll apply it for the company's
success.
The corporation may easily succeed in reducing both operational and capital expenses by
using management accounting's budgetary control and capital budgeting tool. After then, the
corporation may lower its pricing, and it will make a lot of money.
Principles of management accounting and different methods used for management accounting
reporting
The management accounting frameworks differ mostly in their application, and each is
designed to provide the management with distinct data based on their needs, all while assisting
with autonomous direction. The basic types of executive accounting frameworks are investigated
here, from which MORRISONS Ltd might choose.
Inventory management system: This system is generally used to keep track of an
organization's inventory and stock levels, as well as to save all information and commodities in
its archives (DRURY, 2013). Businesses must comprehend their clients' wants in terms of
market growth and preserve correct records in order to give accurate stock availability and
unavailability information. This is required by MORRISONS management in order to maintain
track of stock levels and process client orders.
Cost accounting system: This is a structure that businesses use to assess and analyse the
costs of their products in order to maintain their competitiveness. It discusses how to cope with
any unexpected product expenditures and how to handle them properly. MORRISONS uses a

cost accounting system to track spending and progress using cost identification. This is required
in order to make the organisation more cost-effective and to enhance revenues by reducing costs.
The price optimization technique is a logical tool that is mostly used to determine the cost
of goods and services given by businesses. MORRISONS sets the prices for its products and
services, which might help with profit analysis. A price optimization plan's main purpose is to
determine prices and match customer demands by offering items.
Job costing system: This is a management accounting system that is correctly linked to
the cost measurement technique in each unit manufactured (Ghasemi Habibi, Ghasemlo, and
Karami, 2019). The purpose of MAS is to help with total direct cost reduction. Due to the
restricted product selection, this is not ideal for small firms. It's ideal for companies with a wide
range of products. In the case of MORRISONS, this accounting approach is broadened to cover
the cost of the manufacturer's items.
Preparation of income statements using marginal and absorption costing
Absorption costing: It suggests that the balance sheet's final inventory is larger, while the
income statement's costs are lower. The approach of fixed overhead expenses differs between
absorption costing and variable costing. Fixed overhead expenses are allocated across all units
produced during the time using absorption costing.
Income Statement under Absorption costing
Particulars Product A Product B
Details £ £ Details £ £
Sales 4600*180 828,000 3200*150 480000
Less: Costs
Direct Material cost 5000*30 150000 3500*24 84000
Direct Labour cost 5000*36 180000 3500*24 84000
Variable
manufacturing
overheads
5000*24 120000 3500*16 56000

Fixed manufacturing
overhead (10:7)
(210000 *
10/17)
123529.4 (210000 *
7/17)
86470.6
Fixed administration
overhead (10:7)
(54000 *
7/17)
31764.7 (54000 *
7/17)
22235.3
Variable selling
overheads
4600*2 9200 614494.1 3200*2 6400 339105.9
Add: Closing stock 400*180 72000 72000 300*150 45000 45000
Budgeted Profit 285505.9 384105.9
Marginal Costing- This expense is incurred when a company decides to expand its production
units. Typically, marginal cost refers to the additional cost incurred when management decides to
add a new section. The marginal cost of production includes the variable price of the
manufacturing system rather than the fixed cost (Hall, 2012). It is also critical for management to
develop more items till their turnover exceeds marginal costs. The change in total price that
occurs when the quantity created is maximised by the additional one unit is known as marginal
costing. It's also known as the expense of adding an extra cost to products and services.
Income Statement under Marginal costing
Particulars Product A Product B
Details £ £ Details £ £
Sales 4600*180 828,000 3200*150 480000
Less: variable
cost of sales
Direct Material
cost
5000*30 150000 3500*24 84000

Direct Labour
cost
5000*36 180000 3500*24 84000
Variable
manufacturing
overhead
5000*24 120000 3500*16 56000
Variable selling
overheads
4600*2 9200 (459200) 3200*2 6400 (230400)
Closing stock 400*180 72000 72000 300*150 45000 45000
Contribution 440800 294600
Less: Fixed cost
Fixed
manufacturing
overhead
(210000 *
10/17)
123529.4 (210000 *
7/17)
86470.6
Fixed
administration
overhead (10:7)
(54000 *
7/17)
31764.7 (155294.1) (54000 *
7/17)
22235.3 (108705.9)
Budgeted Profit 285505.9 384105.9
From the above cost sheet, it can be seen that the business is earning more profits from its
product line B and the net budgeted profits earned by the business by selling product A and B is
669611.8. Management accounting systems, notably marginal costing and absorption costing,
make it simple for management to compute net income and profits for the company. The
calculation of net income using the marginal and absorption costing methodologies aids in the
engagement of all costs associated with the firm. The procedures of company accounting will
assist management in maximising their overall margin of profitability and productivity, which
will be used to compile the management's financial report statement (Hariyati, Tjahjadi, and
Soewarno, 2019). Both of these accounting approaches and reporting will allow management to
generate a budget that will allow them to carry out their responsibilities effectively.

TASK 2
Advantages and disadvantages of budgetary planning tools
A budget frequently estimates a company's future results as well as its financial situation
across one or more fiscal years. Budgets are frequently created for future planning, performance
evaluation, the introduction of new goods and services, and operational monitoring. A budget is
frequently used to estimate a company's short-term cash requirements. Organizations that now
utilise budgets to assess yearly budgets are able to keep a close watch on reality and, as a result,
can analyse the causes of deviations from expected outcomes. The following are some of the
advantages of budgetary control techniques with their description:
Master budget
This budget takes into consideration all of the company's smaller expenses and translates them
into budgeting. Another phrase is superiority budgeting, which refers to the information
contained in all budgets created by administration in order to operate the company and improve
quality (Harrison, and Lock, 2017). In order to provide the most accurate information on
productivity gains, the organization's management sets a budget by taking into account all
income and costs, as well as a breakdown of all budgeting and other expenditures that arise while
beginning a restaurant.
This organisation has the capacity and infrastructure to deal with issues that arise
throughout the course of business operations and to improve work efficiency. Morrisons
concentrates on all minor budgets with the master budget, allowing operations to be managed
and addressed while keeping profitability.
Selectivity is essential while creating the master budget, which Morrisons finds difficult to
recognise and use in their industry. Because of the high number of categories and statistics, this
budget is difficult to comprehend and adjust.
Capital Budget
A capital budget is a budgeting tool that combines both capital expenditures and revenue.
MORRISONS generally uses capital budgeting to provide funding for the purchase and upkeep
of marketable securities.
Merit: The capital budget is used by MORRISONS's financial planners to analyse the long-
term sustainability of capital investments. It also helps with understanding relative risks and their
effects.

Merit: Capital budget decisions are made for a long time and are not subject to revision.
Incorrect judgments have a wide range of negative repercussions and have a significant impact in
long-term viability (Khosiev, 2019). MORRISONS management finds it difficult to raise funds
due to insufficient spending.
Operating budget
This planning tool is a comprehensive forecast of all estimated expenditures and revenues
for a certain time period, based on expected revenue. Operating budgets assist Morrisons in
organising everyday tasks so that the company does not run into financial difficulties.
Merit: Morrisons operating capital is derived from operating budgets so that present
spending can be better controlled and future expenditures may be forecasted. It also helps with
the growth of deposited funds and the systematic monitoring of all transactions.
Merit: Morrisons financial data varies from month to month as the company achieves or
exceeds revenue projections. Any budget estimates will be incorrect in this case if the
operational budget is not modified on a regular basis to reflect new income numbers.
Marginal cost pricing
According to marginal cost pricing, All costs of things are priced at marginal cost, which is
still up in the air as far as the cost premise is concerned. On the other hand, increased production
costs add extra units to products, which helps to account for fluctuating production costs.
A few more planning strategies are discussed further down:
Cash-only budgeting, often known as classic budgeting, considers the outflow and inflow
of money receipts and instalments. This expenditure strategy will allow MORRISONSLtd to
maintain its financial assets (Otley, 2016). The key advantage is that it contains a straightforward
evaluation of the benefit and misfortune in the budget summary, while the primary disadvantage
is that it has limited credit exchange capability.
Zero-based budget: This financial plan is built on the notion of zero. Each expense is
fundamentally promoted in a fresh era in this. This expenditure plan may be used by
MORRISONSLtd to determine the costs associated with the activities. The main benefit is that it
helps to eliminate repetitious and inefficient movement, but the main disadvantage is that it isn't
suitable for short-term planning since it may contain one-sided data.

Response of management to financial problems
An organisation employs a variety of tactics and processes that are beneficial in controlling
its expenditure plans. Furthermore, by assessing monetary factors with the use of numerous
instruments, executives may easily establish procedures that aid in the resolution of financial
issues. The purpose for using financial instruments is that they aid businesses in deciding on and
establishing a few specific rules that will help them accomplish job in the future. It also
motivates the board to adjust headings, which increases and improves corporate efficiency.
Because today's organisations must continually change to a competitive environment,
management accounting techniques can help them respond to it and handle financial issues.
MORRISONS uses management accounting strategies to try to focus on financial benefits.
Managerial accounting is frequently used as a benchmarking tool to identify crucial financial
areas in which the company excels, which may help finance experts improve the overall quality
of operational procedures at MORRISONS (Pelz, 2019). When it comes to internal
benchmarking, accounting is a smart place to start. Financial performance evaluation is usually
seen as a critical success factor for huge MNCs like MORRISONS, and as such, it must be
managed correctly. MORRISONS's management accounting systems have been upgraded,
allowing the company's management to uncover a sound tracking capability in contrast to its
rivals, such as other organisations. Management accounting techniques are robust financial
control systems that have survived the test of time in computer software companies like
MORRISONS.
The Balanced Scorecard, which is an illustrated model of financial outcomes measurement, is
another major tool utilised at MORRISONS, and it contributes greatly to improving the
organization's overall effectiveness and performance. In terms of improved financial planning,
MORRISONS might benefit from management accounting software. Finance managers and
accountants can simply present the financial situation to creditors in order to increase credit
limits, thereby promoting the firm's organisational growth (Sledgianowski, Gomaa, and Tan,
2017). In terms of earnings percentage, share price, economic value added, EBIT, devaluation,
ROC, ROE, and other key financial results influencing factors, income-seeking companies like
MORRISONS support accounting management measures to overcome the traditional short-term
financial issues that MORRISONS is currently facing. As a consequence, MORRISONS will be

able to develop lasting financial data through the use of income statements for efficient
operational methods, allowing it to compete with major global competitors such as Walmart.
How Management accounting helps in achieving sustainable success
Management accountants assist businesses in achieving long-term success. Long-term,
sustainable success is the responsibility of boards and top management. By selecting strategy,
setting risk appetite, expressing the organization's culture, and managing change, they hope to
continue to provide value for stakeholders over time. Management accountants assist them in
doing so by finding and pursuing opportunities to produce value for stakeholders while also
controlling expenses and risks in a proactive manner.
Effective management accounting functions are present in successful organisations. A
management accounting function's effectiveness is based on a mix of skilled individuals, clear
principles, well-managed performance, and sound processes.
how organisations adopt Management systems
KPIs (key performance indicators) are one of the most effective tools for assessing an
organization's performance. This also aids in examining the genuine presentation of labour force
and offices with the expected outcomes. The genuine execution of all offices is examined using
pre-determined business concepts. In addition, association inward administration dissects all
varieties of execution, which aids in identifying those areas that want correction. Finally, using
KPIs to examine all phases of accomplishment factors, the capacity to recognise their
manifestation in corporate goals is identified. MORRISONS uses this device to deal with their
financial problems (Spraakman, and et. al., 2015). The monetary issue determines the specific
situation in which the organisation suffers multiple contribution challenges due to a lack of
monetary assets. The MORRISONS Ltd must examine the causes of the problem and develop a
strong strategy to overcome the financial problem. MORRISONS Ltd looks at a variety of
financial difficulties, including the sudden charges right from the outset. Because each
organisation engages in specialised trades on a daily basis, companies may face unexpected or
unexpected expenditures as a result of improper asset use. Another issue that MORRISONS Ltd
is looking at is client late payments.
BALANCE SCORECARD APPROACH The balance card technique is used by the
particular organisation to align all business operations with the goals and objectives set out by
the organisation. The primary goal of the balance card technique is to coordinate and assess all

actions, as well as to assist employees in planning training sessions. This enables employees to
complete the assignment and their job function in a more efficient and methodical manner.
Marks & Spencer uses this to connect its operations and tasks with the company's aims and
policies.
Planning tools are quite important for management in order to tackle their financial
challenges. Planning tools assist management in resolving challenges and concerns relating to
the forecasting of future costs and income. As a result, the management employs a variety of
budgets to assist them in resolving their financial problems.
CONCLUSION
There are several administration management accounting frameworks that aid in effective
administration management accounting, such as cost management accounting, value
development, value streamlining, and many more. There are several administrative management
accounting reports available, including spending plans, money due, execution, and stock
management reports, all of which aid in the development and success of the organisation.
Finally, it is reasoned that there are a variety of methods that aid in monetary control, such as
capital spending plans, working capital plans, zero-based budgeting, and money-only budgeting,
all of which aid in effectively organising spending plans. Additionally, corporate financial issues
might be remedied by employing tools such as KPIs, benchmarking, monetary management, and
monetary objectives.

REFERENCES
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