Management Accounting Systems and Techniques

This assignment explores the concept of management accounting systems and their essential requirements. It discusses various methods for management accounting reporting and the calculation of costs using appropriate techniques. It also examines the advantages and disadvantages of planning tools in organizations. The case study focuses on Creams Ltd., a company that produces ice-creams, doughnuts, and waffles.

Management
Accounting

Contents
INTRODUCTION...........................................................................................................................................3
TASK 1..........................................................................................................................................................3
P1: Management accounting systems and their essential requirements................................................3
P2: Methods for management accounting reporting..............................................................................4
TASK 2..........................................................................................................................................................6
P3: Calculation of costs using appropriate techniques............................................................................6
TASK 3........................................................................................................................................................12
P4: Advantages and disadvantages of planning tools............................................................................12
TASK 4........................................................................................................................................................14
P5: Comparison of organizations in adapting to management accounting systems to solve financial
problems...............................................................................................................................................14
CONCLUSION.............................................................................................................................................15
REFERENCES..............................................................................................................................................16

INTRODUCTION
The provision of accounting data, facts, figures and information which can be used by the
managers of an organization for the purpose of decision-making, organization and development
of the business is known as management accounting (Cooper, Ezzamel and Qu, 2017). The
people who have this role in a company are known as management accountants. It is helpful for
the firms in taking the decisions required for different purposes. This assignment is based on
Creams Ltd., a company which makes varied products such as ice-creams, doughnuts and
waffles. In this project, specific analysis will be made on the demonstration of understanding of
management accounting systems, applying a range of management accounting techniques.
Additionally, focus will be made on use of planning tools and comparison of ways in which
organizations can use the data of management accounting systems to resolve their financial
problems.
TASK 1
P1: Management accounting systems and their essential requirements
There are four systems broadly used in management accounting by the managers for
decision-making. The explanation of these systems in the context of Creams Ltd. is as follows-
Cost accounting system- A cost accounting system is a framework used the firms in
which techniques are used to find out different costs incurring in an organization
(Cuzdriorean, 2017). This is done to find out any problems and issues persisting with the
firm and also to find its excessive cost which needs to be reduced to increase the profits.
Thus is it is an effective tool for the management to control and monitor the overall costs.
Creams Ltd. can use it to find and reduce its excessive cost.
Essential requirements-
 There must be cooperation and coordination from various departments in the firm such as
production, marketing, finance, HR etc. for the successful implementation of cost
accounting system.
 The cost of installing this system should be justified in the results which are obtained in
the company as there should be significant improvements achieved.
 This system should allow for reduction in the overall costs related with the enterprise so
that profits can be maximized effectively and efficiently.
 This system should allow for reduction in overheads so that unnecessary expenditure
related to the overheads can be avoided.

Inventory management system- An inventory management system can be manual or a
computerized system which monitors and controls the flow of inventory in an
organization (Carlsson-Wall, Kraus and Karlsson, 2017). The managers of Creams Ltd.
must use it so as to track the flow of their inventory level and to ensure its proper
management. This will facilitate availability of stock items whenever required while also
ensuring that there is no mismanagement of stock items in the organization. This will
increase the efficiency and effectiveness in the organization.
Essential requirements-
 In an inventory management system there should be management of suppliers of goods in
the organization. This facilitates the tracking of inward movement of goods so as to
ensure their proper management.
 An inventory management system should also facilitate stock management which will
ensure that stock is available whenever required.
 It should facilitate for tracking of level of inventory within an organization so that there is
no loss of the items in the inventory of the organization.
 It should allow for effective use of methods for inventory control like LIFO, FIFO, and
Weighted Average Cost Method Etc.
Job costing system- It is a process of accumulation of information regarding costs
associated with a specific production or service job (da Silva Laureano, Cardoso Vieira
Machado and da Silva Laureano, 2016). It is highly useful for manufacturing companies
which take orders from their clients for producing specific products according to their
needs and requirements. As Creams Ltd. is a company which deals in ice-creams,
doughnuts and waffles it is a highly useful system for it because it can help it in tracking
and managing its various job orders and ensure that clients get their orders fulfilled on
time.
Essential requirements-
 Job costing system should be able to track the orders given by customers to the
organization and ensure their sound management so that they are completed within the
given time frame.
 Job costing system should be able to provide the clients a rough estimate of cost to be
incurred in their contract and must be able to find out profits of the company.
 It must facilitate reduction in costs of completion of order so that profits can be
maximized.
 It must be able to reduce the costs being incurred in completion of orders in the
organization.
Price optimization system- This system makes use of models which track how price
varies at different demand levels. Managers of Creams Ltd. can use it to set price
according to demands so that higher profits can be ensured.
Essential requirements-

 Price optimization system should include three pricing elements which are pricing
strategy, value to buyer and seller and tactics.
 Price optimization system should be able to forecast change in demand levels so that
mangers can change pricing strategies accordingly.
 It must be able to facilitate change in price according to change in demand levels.
 It must be able to adjust prices according to prices charged by the competitors.
Thus, management accounting is all about using its various types of systems, tools and
techniques in order to take best advantage of it and take the right decision. Taking a right
decision will benefit a firm in the long-run against its competitors.
P2: Methods for management accounting reporting
Management accounting reports are used in order to get better insights and details of the
performance of a business enterprise so that controlling and monitoring measures can be taken if
required to regulate performance (Hall, 2016). Managers of Creams Ltd. can use it so that
performance can be measured and improved. The different types of reports which can be used by
them are as follows-
Budget reports- Budget reports are prepared on the basis of various budgets prepared in
an organization such as cash budget, operating budget, master budget etc. It summaries the
findings and forecasts of all of them to give thorough conclusions and recommendations as and
when required. They also help the managers in taking the right steps by forecasting their future
incomes and expenses. The managers of Creams Ltd. can use these reports so that they can bring
more efficiency, effectiveness and productivity in the organization’s functions. This will help the
enterprise to work according to its budgeted expenses to earn steady profits. Also it will lead to a
surplus in operations of company so that deficit can be avoided. For example- Creams Ltd.
makes use of these reports to prepare an annual plan showing the revenues and expenditures of
the organization.
Accounts Receivable Aging Reports- These reports can be prepared by the managers to
manage the debtors of an enterprise. They can then be segregated according to their credit limit
and the time period given to them for paying off their debts. The managers of Creams Ltd.
should use these reports as they are highly helpful in finding out those debts which haven’t been
paid since a long time and also to list some debts as potentially bad which have no scope of
repayment. Thus it helps in identifying aging debtors so that a strategy can be framed for
recovering debts from them. For example- Creams Ltd. makes use of these reports so that it can
maintain a track record of its debtors and identify the potential bad debts so that a provision can
be made.
Cost Managerial Accounting Reports- These reports can be prepared on the basis of
cost accounting facts, figures and information of a particular company (Hopper and Bui, 2016).
The managers of Creams Ltd. can use them for getting deep insights about their business
operations and functions and the costs that are being incurred in them. They can also help in

finding out extra costs associated with various functions in the company and the ways to reduce
them so that the long-term objective of profit maximization can be achieved. Cost accountants
can benefit the most from the preparation of these reports. They help in optimizing the use of
financial resources by all the departments of the company such as production, finance,
marketing, HR etc. In these reports technique of standard costing can be used for comparison
purposes and finding out favorable or adverse variances. For example- These reports are used by
Creams Ltd. to find out the techniques it can use to reduce its costs effectively.
Performance reports- These reports can be prepared to have an overview of the
operations and functioning of the entire business (Maas, Schaltegger and Crutzen, 2016). They
help in analyzing the overall performance and optimizing it so that efficiency, effectiveness and
productivity can be achieved in the organization. The managers of Creams Ltd. can use these
reports so that monitoring can be done for the entire enterprise and controlling actions can be
taken. Overall, management can easily find out certain errors and mistakes which are made
during the functioning of the business so that quick rectifying actions can be taken for the benefit
of the firm. These reports can allow for optimization of performance at a maximum level so that
long-term objective of maximization of profits can be achieved. For example- Creams Ltd.
makes use of this report so that it can optimize the overall performance of its employees.

TASK 2
P3: Calculation of costs using appropriate techniques

From the above examples, it can be seen that Creams Ltd. has used the following techniques for
calculation of its costs- marginal costing and absorption costing. The explanation about these
techniques in the company’s context is given as follows-

Marginal costing-
This technique charges variable cost to the units of production and fixed cost is adjusted
against the contribution (Malina, 2017). Thus it is a very good approach to find out the overall
costs being incurred in the organization. It helps in calculation of costs as well as also finds out
the break-even point which is a point where a firm makes no profit and neither does it incur a
loss. Thus this technique is highly useful from the point of view of the management of the
enterprise. The managers of Creams Ltd. have used this technique for calculation of the costs.
Advantages-
 Marginal costing is very useful for comparison purposes in a company as its break-even
point can be easily compared to that of the competitor. This helps management in
comparison so that effective strategies can be made to get ahead of the competition and to
earn higher level of profits in the future.
 The impact profit fluctuations can create on the sales of organization is clearly shown in
marginal costing approach. It shows their impact on the sales of the company and how
the change at different levels affects the production of goods in the firm.
Disadvantages-
 Marginal costing technique makes it very difficult to determine the degree of variability
in semi-variable costs of the enterprise. The change brought in them is not reflected in the
marginal cost statement.
 The valuation of stock is not accepted by the tax authorities since stock does not show the
true value. Thus it creates a disadvantage for the organization.
Absorption costing-
Absorption costing is a technique which takes into account all the costs associated with
the production of goods be it direct, indirect or the overheads (Nørreklit, 2017). Thus the
costs are classified into these three categories. Creams Ltd. has used this technique for the
calculation of its costs. It is highly useful for managers in various aspects of managing an
organization.
Advantages-
 It recognizes the importance of fixed manufacturing costs in determination of costs
associated with a product. Thus it takes them into consideration while calculating the
costs of the enterprise. Thus more accuracy, efficiency and effectiveness are ensured in
cost calculation.
 It helps in disclosing of information related with inefficient utilization of resources in
production because of under-absorption or over-absorption of the factory overheads. This

helps in finding out the reasons for decrease in profits if it is reported in the accounting
statements of the firm.
Disadvantages-
 Absorption costing is highly dependent on the output levels as different costs for different
output levels are determined in it. Thus it makes the comparison and cost control very
difficult in the organization. Therefore costs can rise decreasing the overall profits.
 It is not very helpful in providing the required help to the mangers for taking of important
decisions in the enterprise. Though very useful it does not provides facts, figures and
information required for taking the important decisions in the organization. Thus
decision-making ability of mangers is affected to a great extent if they use this technique.
TASK 3
P4: Advantages and disadvantages of planning tools
There are different planning tools which can be used by the managers for various
purposes in an organization (Otley, 2016). The planning tools which Creams Ltd. uses are as
follows-
Budgets-
Budgets refer to an estimation of revenues and expenses over a certain period of time
(Oyewo, 2017). The managers of Creams Ltd. use it so that forecasts regarding incomes are
made and limits are set for expenses which are likely to be incurred in the organization.
Advantages-
 Framing of budget increases the probability of achievement of short-term and long-term
goals and objectives of the organization.
 Budgets display the strengths and weaknesses of the organization so that it can
concentrate on them.
Disadvantages-
 A lot of time is required in order to prepare a budget which makes it quite time-
consuming.
 It is very costly and expensive to prepare the budget and thus not every organization can
afford to prepare one.
Planning tools used in budgetary control-
Cash budget-
Cash budget refers to an estimation of cash receipts and expenses incurred over
the time in a firm. Creams Ltd. can make use of this budget so that cash resources are
optimally utilized.

Advantages-
 It helps in optimizing the cash resources to derive their best usage.
 It helps in maintaining the liquid resources of the organization.
Disadvantages-
 It leads to rigidity in cash operations.
 If made improperly it can result in inaccuracies within the organization.
Operating budget-
Operating budget refers to an estimation of operating receipts and expenses over a certain
period of time. It can be used by the managers of Creams Ltd. to effectively maintain
their operating profit.
Advantages-
 It helps in managing the operating expenses within a firm.
 It helps in effectively allowing tracking of operating expenses.
Disadvantages-
 If made improperly it can result in wrong conclusions.
 It is quite costly to prepare.
Cost-volume-profit analysis-
Cost-volume-profit analysis is a tool which is used in cost accounting. It is used for
determination of operating and net income as it analyzes the impact of change in costs
and volume. It makes use of certain assumptions and is very useful for the organizations
for their short-term planning. It calculates the break-even point where a firm earns no
profit and neither does it incur a loss. It is a fundamental financial analysis tool used for
ascertaining the underlying profitability of a business (The components of cost volume
profit analysis, 2018). Creams Ltd. uses it for formulation of short-term plans in the
organization and to calculate its break-even point for analysis and comparison purposes.
Advantages-
 It helps in finding out the break-even point of the company which helps in comparison
with its other competitors.
 It sets a strong base for planning and marketing efforts of the firm.
Disadvantages-
 It makes use of assumptions. Some of these assumptions are quite unrealistic in nature.
 No. of units cannot be the only driver of total costs and revenues in the organization.
Pricing strategies-
Pricing strategies are used by organizations to set up a price according to prevailing
conditions in the market so that profits can be maximized in the long-run (Suomala and
et.al., 2017). The managers of Creams Ltd. can use it so that strategies are prepared

effectively and efficiently to set up a right price relevant in the context of the
organization.
Advantages-
 Right use of pricing strategies can raise the level of profits in a company very easily.
Thus they have to be used wisely according to the prevailing conditions in the market and
according to pricing strategies adopted by the competitors.
 Selection of right pricing strategy not only provides a firm with the competitive
advantage but also leads to its sustainable success in the future. It has to act according to
the behavior shown by its competitors in the market if it has to gain strategic advantage
over the long-term.
Disadvantages-
 If not applied correctly it can make the company go behind that of its competitors and
lose the strategic advantage it has gained over the years through goodwill and brand
image.
 If a wrong pricing strategy is selected then it will lead to reduction in the profits of the
company and thus its image in the market can be affected due to this.
TASK 4
P5: Comparison of organizations in adapting to management accounting systems to
solve financial problems
Financial problem refers to problems and issues concerning with financial pressure a
business may face. They can lead to reduction in efficiency, effectiveness and productivity in the
organization and can also reduce the profits (Quattrone, 2016). As an organization, Creams Ltd.
also faces certain financial problems which are discussed as given below-
Under-absorption of overheads- The overhead expenditures which incur in Creams Ltd.
are left under-absorbed which creates accounting issues for the company. Thus its books of
accounts and financial statements do not reflect the true picture of the operations in the firm.
Wrong valuation of stock- The stock is valued wrongly in Creams Ltd. due to
mismanagement in the inventory department. This happens due to selection of wrong method for
inventory valuation and lack of tracking of inward and outward movement of stock.
Techniques used by Creams Ltd. to resolve these financial problems-
KPIs- KPIs or Key Performance Indicators are used for measuring and analyzing the
performance so as to ensure that optimum performance is being achieved (Renz, 2016). In it
various metrics are used. Also KPIs are of two types- financial and non-financial. Financial KPIs
measure the quantitative aspect and Non-Financial KPIs measure the qualitative aspects. Creams

Ltd. can use KPIs to resolve the problem of wrong valuation of stock as Inventory Turnover
Ratio from Ratio analysis can be used for this purpose. This will help in solving the issue
concerning with the inventory of the company.
Benchmarking- Benchmarking refers to the use of benchmarks and standards to measure
and compare the performance of the company (Scapens, 2016). Creams Ltd. can use this
technique so that it can solve the problem of under-absorption of overheads because it can be
used to set up a limit for overheads so that performance targets can be achieved. By setting limits
for overheads it will be ensured that they do not exceed that limit and thus expenses will remain
low allowing for the increase in profits.
Financial governance-
Financial governance refers to the ways, tools and techniques which a firm adopts to
plan, organize, control and monitor its financial resources (Schaltegger and Burritt, 2017). It is
an internal system used by organizations to ensure that financial resources are being used
optimally so that maximum benefit can be derived from their usage. Creams Ltd. can use
financial governance to resolve its problems of under-absorption of overheads and wrong
valuation of stock. It can be also used for internally regulating and controlling the financial
performance of the company so that it does not fall behind that of the competitors.
Comparison between organizations-
Basis Creams Ltd. Suncream Diaries Ltd.
Financial problem Creams Ltd. is facing problem
of over-expenditure as some
of its department are having
higher costs than usual.
Suncream Diaries Ltd. is
facing the problems of low
profit due to lack of
aggressive pricing strategy
adopted by it.
Management accounting
system used
Cost accounting system Price optimization system
Application of the system It can be applied by Creams
Ltd. by checking and reducing
the costs of the organization.
It can be applied by Suncream
Diaries Ltd. by optimizing its
price according to demand
levels to earn higher rate of
profits.
Management accounting systems used to solve problems-
Cost accounting system- Creams Ltd. will use cost accounting system to solve its
problem of over-expenditure because this system will allow finding out and reducing the
excessive costs in the organization.
Price optimization system- Suncream Diaries Ltd. will use price optimization system to
solve the problem of low profit because this system will allow for setting of right price in the
organization for its products.

CONCLUSION
From the above report, it can be concluded that management accounting aids managers in
decision-making by allowing them to make several policy-related decisions. It helps them in
altering strategies to face competition and finding out problems and issues to address them by
using several rectification methods. This ensures that profit of the enterprise is not affected.
There are various systems of management accounting which can be used by an organization.
Reporting methods can be used to create and analyze reports. Costs can be calculated using
different techniques such as marginal costing and absorption costing. Planning tools for
budgetary control have their own advantages and disadvantages. Organizations are now using
management accounting systems to address their different types of financial problems.

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The components of cost volume profit analysis. 2018. [Online]. Available through:<
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