Importance of Management Accounting

The provided assignment discusses the importance of management accounting in a business setting. It explains that management accounting is essential for making informed decisions, creating financial plans, and evaluating organizational performance. The report emphasizes the use of various management accounting techniques, such as costing methods, to improve profitability and maintain financial stability. Additionally, it mentions the role of key performance indicators (KPIs) and benchmarking tools in resolving financial issues and ensuring organizational success.

Management
Accounting

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and its different systems..........................................................1
P2. Explain different method of management accounting reporting......................................2
M1. Evaluation of benefits of various management accounting systems..............................3
D1 Management accounting system and management accounting reporting are integrated
with organisation process.......................................................................................................4
TASK 2............................................................................................................................................4
P3: Cost accounting techniques to prepare an income statement...........................................4
M2: Management accounting techniques and financial reporting documents.......................7
D2. Financial reports which applies to interpret many business activities.............................7
TASK 3............................................................................................................................................8
P4. Advantages and disadvantages of different types of planning tools used for budgetary
control.....................................................................................................................................8
M3. Usage of different planning tools for preparing and forecasting budgets.....................10
TASK 4..........................................................................................................................................10
P5 Comparison of how organisation adopt management accounting system so as to respond to
financial problems................................................................................................................10
M4 Analysis of how in responding to financial problems management accounting can lead
organisations to sustainable success.......................................................................................2
D3 Various planning tools to resolve financial problems......................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Management accounting play a significant role for an organisation as it assist the
management to make suitable reports which enables them to formulate an effective decision. For
this, accounting manager is held liable to perform its roles and duties in reliable manner so that
an organisation can maintain its financial stability in competitive market for longer period of
time. The present assignment is based on LM Engineering ltd company which is engaged in civil
engineering and planning services based in United Kingdom and offers to the people of northern
British Columbia. The project discussing various management accounting system along with
their benefits. The project also includes reporting system, cost accounting methods, planning
tools to control budget including contingency, flexible and scenario tools along with their merits
and demerits. There are various financial resolving tools such as KPI, Benchmarking etc. which
will be also explained briefly in order to maintain profitability of organisation in market.
TASK 1
P1: Management accounting and its different systems
Management accounting may be defined as the process or an activity of recognising,
summarising, presenting and recording of financial transactions in books of accounts such as
profit and loss account, balance sheet, cash flow statement etc. The concept of management
accounting are directly related with tracking and estimating costs that will be incurred in future
business operations so that wastage of funds can be eliminated (Management accounting and its
importance, 2019).
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LM ENGINEERING LTD. company use various accounting systems in order to maintain
financial records on the basis of which decisions has been made for the purpose of achieving its
desired goals and objectives. Here are the some accounting systems which can be adopted by LM
ENGINEERING LTD.:
Cost accounting system: It is a system which is beneficial to analyse cost of goods and
services including variable, fixed cost etc. It is essential for every organisations such as LM
ENGINEERING LTD. to have proper estimation about the cost invested in providing its
offerings due to estimating their net profitability generated in near future. LM ENGINEERING
LTD. can adopt such system with the purpose of analysing cost of different products and services
which enable them to offer in market with added margin.
Price optimisation system: It is a system which assist LM ENGINEERING LTD. to
identify buying perception of its targeted customers which enable them in setting up their prices
that ensures their profitability in future period of time. For this, accounting manager need to hire
researcher to bring out the information about the satisfaction level of their targeted customers in
relation of their current pricing policy which drives them to re-think whether to continue to
follow existing pricing policy or should change it in future (Christ and Burritt, 2013).
Job costing system: It refers to the system which assist LM ENGINEERING LTD. in
calculating total cost that will be incurred in providing its wide range of products and services
after allocating cost to each financial service individually. It is most suitable to adopt by
organisation who is providing its products and services in different range. LM ENGINEERING
LTD. can use such system to make proper estimation of each individual unit's cost so as to
determine their future profitability generated by them from each of its products and services.
Inventory management system: This is the system which is used to track the status of
inventory available with an organisation as it enable an organisation to meet its customer's
expectations and needs on time which increases loyalty and trust towards an organisation. LM
ENGINEERING LTD. uses such system in order to ensure about the availability of its products
and services. For an instance, if firm wants to track mortgage loan's clarification then such
system help in checking the status of that service.
Comparison of management accounting and financial accounting:
Basis Management accounting Financial accounting
Meaning It is a system which is It is a system which mainly
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providing relevant and useful
details to the management
which directs them to
formulate an effective plans
and policies.
focuses on preparing financial
statements includes profit and
loss account, balance sheet etc.
so as to ensure about their
existing financial position in
market.
Users Internal parties such as
managers and management
who have authority to make
plan and monitor the business
activities.
External parties such as
investors, financial institutions
etc. who have authority to
make financial decision.
Time focus Future perspective Historical perspective
Rules and regulations Not any restrictions by any
outside parties.
Must required to follow
IRS/GAAP and prescribed
formats.
P2. Explain different method of management accounting reporting.
There are different management accounting reporting system which facilitates the
management to identify the actual position of an organisation at present times. It drives them to
prepare an effective plans and policies which increases the possibilities of achieving
organisational goals and objectives within pre-determined time period. Such reports includes
information of both monetary and non-monetary terms. LM ENGINEERING LTD. prepares
different types of reports which includes:
Performance reports: It is the report which is prepare with the purpose of measuring the
performance of employees as well as an organisation. It provides relevant information about the
current performance of employees which enable management to identify the issues or problems
that harms their expected performance. This will help management of LM ENGINEERING
LTD. in taking corrective decisions to resolve their issues and retain their loyal employees for
longer period of time (Garrison and et. al., 2010).
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Budget report: It is a report which describes the allocation of cost to each business
activity according to their output forecasted by the management of LM Engineering Ltd. This
report makes easy for management as well as employees to perform well without any wastage of
resources. LM Engineering Ltd. uses this report in terms of ensuring about sufficient amount of
funds at the time of execution of construction activities. This will help in reducing cost of
operation and increase utilisation of resources.
Accounts receivable ageing reports: Such report explains the information about the
unpaid debtors of LM Engineering Ltd. which hugely affects their profitability. It is mainly
related with the credit transactions. It directs the finance department to identify those debtors
whose payments are until not done so that recovery can be made through taking an effective
plans and strategies. It also assist management of LM Engineering Ltd. to update their credit
policies in case of avoiding any bad-debts situations (Kober, Subraamanniam and Watson,
2012).
Cost managerial accounting report: It is the report which provides the full details about
the cost or money invested in the execution of business operations. It directs the management of
LM Engineering Ltd. to make proper calculations of all expenses before selling and the outcome
received after selling it to the final customers. Such kind of report facilitate LM Engineering Ltd.
in controlling unnecessary cost which negatively affect their overall profitability. Information
provided through such report motivates the managers to reduce cost of operations on every next
year so that maximum increment can be done in profitability.
M1. Evaluation of benefits of various management accounting systems
Different management accounting systems have different benefits if an organisations uses
such system for the purpose of achievement of its desired goals and objectives. Here are the
some management accounting systems along with their benefits:
Advantage of cost accounting system:
 It is helpful for management to set up the prices of products by analysing the cost
invested in producing the products and services (Lukka and Vinnari, 2014).
 It facilitate management to determine the causes of extra cost incurred in business
process which enable them to make effective planning in future.
Advantage of inventory management system:
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 It assist LM Engineering Ltd. to meet its loyal customers needs and demands on time
through keeping the stock of inventory at the time of production.
 It reduces inventory storage cost as such system facilitate management of LM
Engineering Ltd. in identifying the current inventory position which enable them to make
decision whether to order further inventory or not.
D1 Management accounting system and management accounting reporting are integrated with
organisation process.
For the beneficial of LM Engineering Ltd., integration between management accounting system
and accounting reporting is must as both concept assist management in making an effective
decisions and plans in achievement of organisational goals and objectives. For example,
maintaining records of transactions made by LM Engineering Ltd in managerial reports can be
possible only if management accounting systems are used such as inventory management system
help in providing sufficient information about the current level of inventory which further to be
recorded under inventory management report.
TASK 2
P3: Cost accounting techniques to prepare an income statement
Cost: It may be defined as the amount of value which is provided by an organisation
through their products and services by investing funds in production and distribution prices. It is
required on every stage which starts from production to selling it to the final targeted customers.
Absorption costing: It defined as a technique which is used to calculate costs invested in
manufacturing or producing products and services. It comprises of both variable and fixed costs
due to which it is also known as full costing method (Absorption costing, 2018). .
Marginal costing: It is a method which is also used to calculate net profitability of
company including only variable cost. It is most adopted method especially by small and
medium large organisation as using such costing method shows more profitability in financial
statement of an organisation.
LM Engineering Ltd. can uses both these costing methods according to their objectives and
purposes. Here are the calculation of net profitability of LM Engineering Ltd. using both
marginal and absorption costing method:
Annex (A)
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Budget 2019 2020 2021
Cost
Centre
Budgeted
production
overhead
costs in £)
Basis of
production
(overhead
absorption)
Cost
per
Hour Hours Cost Hours Cost Hours Cost
A 66000 22000 3 24200 72600 26620 79860 27500 82500
B 75000 15000 5 16500 82500 18150 90750 19500 97500
C 83600 41800 2 45980 91960 50578
10115
6 51500
10300
0
Annex (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
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60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order
40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Annex (c)
Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647
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Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
*Average Cash Flow = 7500 = 1250
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Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
M2: Management accounting techniques and financial reporting documents
Management accounting techniques are more useful to maintain financial reporting
documents and statements such as profit and loss a/c, balance sheet, cash flow statement etc. LM
Engineering Ltd can identify its actual financial position only through using accounting tools and
techniques such as financial statement analysis, cost accounting system.
D2. Financial reports which applies to interpret many business activities
Every organisation such as LM Engineering Ltd should prepare its financial reports such as
profit and loss a/c, balance sheet etc. in order to identify their actual financial position. For this,
the management must first required to interpret transactions made during executing various
business activities. It makes easy to know the actual amount invested in particular business
activity.
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TASK 3
P4. Advantages and disadvantages of different types of planning tools used for budgetary
control.
Budget- it work as an internal tool for the company that help them to calculate the
income and expense for a upcoming period or year. Company can divide the budget into minor
task like on quarterly and half yearly bases. So they can evaluate the performance that output
result can be matched with desired result. Budget can be made for anything including money that
earn or spend by government, country, individual and family. It help them to control the extra
expenses (Renz, 2016).
Types of budget.
Cash flow budget- In this type of budget a firm can find out that from where cash came
in business and where it is flow out with in a particular time period. It help a company to find out
that if they are managing their cash sagely and to check out that whether they can start a new
project and are able to paid the work before facing any problem. Like LM Engineering Ltd.
financial service ltd. help small firms to maintain their cash flow budget.
Financial budget- this budget help the company to manage its monetary for a whole
year. It include to maintain company's cash flow, fund flow, income etc. Company can show
their financial strength by maintaining its financial budget effectively. Companies can take the
service of LM Engineering Ltd. financial limited to make a strong financial budget which can
help them to monitor their expenses.
Static budget- it is a unmoving budget that cannot be changed. It can be changed only
when factors such as sales or profits increased. Example – a software company have to bear
fixed cost whether they have project or not so in this case they can use this budget to evaluate
that how much fixed cost have to bear by them on regular bases (Shah, Malik and Malik, 2011)
Budgetary control- it refer that how a manager can utilize their budget in a given
financial year. In easy words it is defined to achieve the specific goals and objective of a
company under the pre-decided budget. Example- LM Engineering Ltd. help the small industry
to make their financial budget as well as budget to increase the sales it depend on what type of a
customer need.
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Contingency tool- it is used in case when a negative event is faced by the company so
they are already prepared that how to respond in such a difficult situation. Contingency plan are
not always negative they have a positive side also.
Merit of a contingency tool.
Stability- At the time of bad and unexpected event contingency plan can help a company to face
those situation by providing them a stable position for their current position.
Responsibility- as in tough times company can outline that who is responsible for such a
bad situation. They can also test their plans and account the employees to perform their duty
(Suomala and Lyly-Yrjänäinen, 2012).
De-merits of contingency plan.
 Contingency plan are very difficult to create as they are made for uncertainties so it is
very hard to predict future so finding a solution for an unexpected event is very complex.
 Contingency plan are reactive for an unexpected situation whether there is a need of
proactive action for such a bad event.
Flexible budget- this is the easiest form of budget. In these company can include those
expenses that can directly affect the actual revenue. Expenses can be increased or income can be
decreased if their is a certain change in the market. At that time flexible budget is suitable for a
company.
Merit of a flexible budget.
 It is very useful in retail business because in these cost are changed in small periods like
discount, offers etc. because in these business the product cost is directly add to the
revenue. LM Engineering Ltd. can create budget as for all small houses as well as for
industry.
 Flexible budget is useful in update of those budget in which company can't mention and
finalized their figures. For such a confusing budget company have take professional
services like Caprion can help them to create those budget.
Demerits of a flexible budget.
 In flexible budget there is always a confusion between deciding that which company cost
is variable and which is of fixed cost. So in these LM Engineering Ltd. have to face clash
with their clients because of last movement changes.
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 It took a lot of time to re-enter or change in figures of the accounting software that is used
by companies to make their financial budget. So in flexible budget there is always an
issue of delay at the time of closing.
Forecasting tool- it is the most essential part of a business strategy. Forecasting help a
business to predict sale, to expand new area with the help of qualitative when the past figure and
fact or data is not available and quantitative technique is applied when future is forecast with the
help of past data.
Merit of forecasting tool.
 The advantage of forecasting is that they provide valuable information for our business
which can help a company to secure their future. LM Engineering Ltd. can help
companies to create budget for their future as it is predicated already with the use of
forecasting tool (Ward, 2012)
Demerit of forecasting tool.
 It is not easy to predict the future always because there are so many scenarios which are
dynamic and create problems in future regarding the company decision. Some times
companies forecasted result are not accurate which make a loss for the company that
disrupt overall budget.
M3. Usage of different planning tools for preparing and forecasting budgets.
Contingency tool, forecasting tool etc. are some planning tools which is used to control the
unnecessary expenses that are not covered under the pre-determined budget. LM Engineering
Ltd should use these tools in order to reduce cost of operations and complete the business
activities within pre-determined allotted budget amount. For example, forecasting planning tool
assist management to make proper estimation of future expenses which makes easy for
management to formulate actions and plans in advance to reduce wastage of funds.
TASK 4
P5 Comparison of how organisation adopt management accounting system so as to respond to
financial problems.
Financial problems:
These are the major concern of every business organisation as it affects their current
operations and brings company backward than their rivals in competitive market. In the context
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of LM Engineering Ltd., there are various reasons which can causes financial problems in an
organisation. Here are the some causes or reasons of arising financial issues:
Cash flow problem: Such issues arises within an organisation when they don’t have
enough cash to pay for its all debts and liabilities. It may occur due to failure of generating
expected outcomes or profitability. LM Engineering Ltd. may faces such issues when the
expenditure are increases as compared with the gains earned by an organisation.
Risk management: Market environment in uncertain in nature which can create risks that affects
current plans and policies framed by an organisation in order to achieve its desired goals and
objectives. Market environment can brings various risks in form of poor technology, lack of
funds, unskilled employees etc. Thus, LM Engineering Ltd. can able to tackle risk only if such
causes will be properly evaluated by the management (Cheng, 2012).
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.
Tools to resolve above mentioned financial issues:
Financial governance: It refers to the rules and regulations framed by the management
of an organisation for it employees with an expectations to follow while performing their roles
and responsibilities. This will eliminate the financial issues as it guide and direct the employees
to perform in systematic way which reduces the chances of performing unethical or bad activity.
Management accounting approach:
It is defined as an effective technique to resolve financial issues within an organisation
through storing financial data at one place which reduces the chances of loosing information at
the time of taking decisions for the betterment of an organisation. This approaches provide
relevant and accurate information to the employees and managers of LM Engineering Ltd. which
makes easy for them to make decisions according to their desired objectives. Here are the some
management accounting approaches which are used to resolve financial issues of LM
Engineering Ltd.:
KPI: It is mostly adopted tool by organisations due to providing more beneficial results
and outcomes in return. KPI tool mainly focuses on analysing the performance level of
employees by comparing their standard performance with actual. It makes easy for managers to
identify the hurdles which restricts their employees to give their best. In the context of LM
Engineering Ltd., KPI tool can be adopted to resolve financial issues by increasing performance
and productivity level of their employees (Qian, Burritt and Monroe, 2011).
Benchmarking: It is technique which can also be adopted by LM Engineering Ltd. in
order to provide right direction to their employees towards desired goals and objectives. The
management of LM Engineering Ltd. can use such tool through setting pre-determined targets
which must be achieved by its employees within given deadline. Benchmark will be set on the
basis of rival’s strategies and plans which encourages the management of LM Engineering Ltd.
to update their current policies and plans in order to achieve competitive advantage in complex
business environment.
Comparison between L.M Engineering Ltd and Morgan Sindall Ltd. Ltd.
Basis of differences LM Engineering Ltd. Morgan Sindall Ltd.
Problem Risk management problem are the
major issue faced by this
Cash flow problem becomes
the major issue which is faced
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organisation as it failed their pre-
palled decisions and policies due to
having business environment
dynamic in nature.
by this organisation as it
restrict their managers to
implement pre-determined
plans and strategies due to lack
of funds.
Approach KPI and Benchmarking tools are best
to adopt by this organisation as it
helps the management in enhancing
the performance level of employees
through motivating them to perform
in right direction and deal with
challenges comes due to complexity
of market environment.
financial governance tool is
best to adopt by this
organisation as it assist
management to follow
systematic way while
executing roles and
responsibilities. It increases the
utilisation of funds which help
company to avoid any shortage
of funds.
M4 Analysis of how in responding to financial problems management accounting can lead
organisations to sustainable success.
LM Engineering Ltd. and its competitor Morgan Sindall Ltd. uses some kind of financial
resolving tools such as KPI, Benchmarking, Financial governance etc. in order to deal with
financial issues which negative affect their sustainability in competitive market. For LM
Engineering Ltd., KPI and Benchmarking tools are beneficial to adopt as both such tools
increases the productivity and performance level of employees. Whereas on the other hand,
Morgan Sindall Ltd. can adopt financial governance which is beneficial for large sized
organisation.
D3 Various planning tools to resolve financial problems
There are different planning tools such as flexible budget, forecasting tools etc. which
facilitate management of LM Engineering Ltd. to estimate the unexpected hurdles so that future
business activities can be properly executed within pre-determined budget without wasting of
funds. This will help company in keeping away from any financial problems.
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CONCLUSION
It has been concluded from the above project report that management accounting is
essential part of every organisation as it directs them to maintain the financial records of every
year due to acquiring sufficient knowledge about their actual financial position in competitive
market. For this, accounting manager is held liable to prepare financial accounts such as profit
and loss accounts, balance sheets etc. on annual basis. In addition with this, it also required for
manager to use different costing methods to calculate net profitability. There are various
management accounting and reporting systems which is useful to adopt in order to make easy for
management to formulate an effective decisions and plans for the betterment of an organisation.
KPI, Benchmarking tools etc. are some kind of financial issues resoling tools which protects an
organisation from any financial instability or losses.
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REFERENCES
Books and Journals
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accounting systems on management performance. Asian Review of Accounting, 20(3),
pp.184-197.
Christ, K.L. and Burritt, R.L., 2013. Environmental management accounting: the significance of
contingent variables for adoption. Journal of Cleaner Production. 41. pp.163-173.
Garrison, R.H. And et. al., 2010. Managerial accounting. Issues in Accounting Education.
25(4). pp.792-793.
Kober, R., Subraamanniam, T. and Watson, J., 2012. The impact of total quality management
adoption on small and medium enterprises’ financial performance. Accounting &
Finance, 52(2), pp.421-438.
Lukka, K. and Vinnari, E., 2014. Domain theory and method theory in management accounting
research. Accounting, Auditing & Accountability Journal. 27(8). pp.1308-1338.
Qian, W., Burritt, R. and Monroe, G., 2011. Environmental management accounting in local
government: A case of waste management. Accounting, Auditing & Accountability
Journal. 24(1). pp.93-128.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Shah, H., Malik, A. and Malik, M.S., 2011. Strategic Management Accounting-A Messiah For
Management Accounting?. Australian Journal of Business and Management Research.
1(4). p.1.
Suomala, P. and Lyly-Yrjänäinen, J., 2012. Management accounting research in practice:
Lessons learned from an interventionist approach. Routledge.
Ward, K., 2012.Strategic management accounting. Routledge.
Online:
Management accounting and its importance [Online]. Available through:
https://www.invensis.net/blog/finance-and-accounting/what-is-management-accounting-
and-its-importance/
Absorption costing. 2018.[Online]. Available through:
<https://www.accountingtools.com/articles/what-is-absorption-costing.html>.
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