MANAGEMENT ACCOUNTING TABLE OF CONTENTS

After evaluating pros and cons of methods it describes various management accounting reports used in company and later depicts the use of these reports and further includes use of different planning tools in addition to effective solutions that management accounting provides for financial problem of the company which leads to efficiency of work in the company. TASK 1 1 Systems of management accounting and their evaluation Management accounting is the process of presenting information whether financial or non financial to the mangers to plan and formulate policies that helps in decision making of formulating budgets

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Systems of management accounting and their evaluation..........................................................1
Management accounting reports and its uses..............................................................................4
TASK 2............................................................................................................................................5
P3. Calculation of absorption and marginal costing...................................................................5
Marginal costing and absorption costing....................................................................................5
TASK 3............................................................................................................................................6
P4 Advantages and disadvantages of tools used in budgetary control........................................6
TASK 4..........................................................................................................................................10
P5. Comparing how organisation are adopting management accounting systems to respond to
...................................................................................................................................................10
Financial problems....................................................................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
APPENDIX....................................................................................................................................15
Income statement using marginal and absorption costing........................................................15

INTRODUCTION
Management accounting is the area of accounts that help in analysing and implementing
financial reports in the regular course of business. It helps in managing accounting information
of everyday activities and enable the company to take its accounting decisions carefully. To have
the better understanding of the topic, the report is based on UK based retailer store, Nisa deals in
food and drinks and is a retail chain of super market. . Further the report lays emphasis on
meaning of management accounting, methods of management accounting in context to the
company and their evaluation. After evaluating pros and cons of methods it describes various
management accounting reports used in company and later depicts the use of these reports and
further includes use of different planning tools in addition to effective solutions that management
accounting provides for financial problem of the company which leads to efficiency of work in
the company.
TASK 1
Systems of management accounting and their evaluation
Management accounting is the process of presenting information whether financial or non
financial to the mangers to plan and formulate policies that helps in decision making of
formulating budgets and forecasting future trends. It identifies problems and acts as atool to
solve them for efficient operations of business.
To record daily operations and activities including cash inflow and outflow, formulation
of new policies, budget planning of the company, managing inventory etc. the need of
management accounting arises as it helps the company by applying techniques which can help
management to take all this relevant decisions in order to maximise the profit and sales of the
company and minimises the losses of the company (Malina, 2018). The UK based food retailer
company Nisa with more than 3500 stores has an effective management accounting which
increases the turnover of the company and enhances the expansion of the company. The systems
of management accounting used in companies are -
Cost accounting – It focuses on reducing project cost, decreasing process cost
effectively to gain economies of scale and to reduce cost of production. It is concerned with
internal cost expenses of the company. The internal cost factors of any company can be its labour
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or employees, the material is manufactures and at last other expenses which can be direct or
indirect like salary paid to employees or transportation cost etc. In Nisa cost accounting is
required to manage relevant information on its employees and their compensation. Nisa supplies
its food items to supermarkets and to manage the transportation cost along with production and
process cost accounting system is needed in the company.
Advantage Disadvantage
It finds out the loss in the company and the
reason behind the losses incurring in the
business.
It requires extra employees and amount of
money for maintenance and installation of the
cost accounting system.
Job costing – It refers to a system where individual unit of output are assigned with cost
of manufacturing that unit. It is mostly used when items that are produced are different from
each other and the company wants to know the cost of manufacturing each product. It help
managers to record expenses and to keep their track. (Maas, 2016).
Advantage Disadvantage
It allows the company to know accurate cost
expenses on different jobs which helps the
company to compare the cost of various jobs.
It relies on estimated data not accurate data.
The overhead costs are relied on expert's
knowledge and non accurate data.
Inventory management- It is the most important aspect of any business which deals
with managing inventory of the firm. It includes goods, parts, raw materials etc. of the company
which need to be sorted, arranged and maintained whether are final products or are in progress
(Chenhall, 2015). Inventory management is efficient when inventory is available at low costs.
There most used inventory system are LIFO and FIFO in which LIFO stands for last in first out
where the inventory which is receive in last will be used first whereas FIFO stands for first in
first out which means the materials that come in first will be used or sold at first. In Nisa, for
improving and managing their inventory they have introduced a new solution called Ensono
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which will monitor and manage ongoing operation activities and inventories. This enable the
company to achieve future growth, cost efficiency and simple solution.
Advantage Disadvantage
It increases the efficiency of work and reduces
the cost of company which lead to profit
maximisation.
The inventory management system has high
installation price and also it is complex in
nature and not that easy to understand.
Price optimisation – Price optimisation means calculating the price and demand on that
particular price at different levels, after obtaining the data it combines the information on cost
and inventory to obtain a price that will improve profits and will persuade consumers to buy the
products at that price (Cooper, 2017). These models helps in setting up the pricing strategy,
product's value for seller as well as buyer and at last it manages elements that are affecting
profitability of the firm by using strategies. For price optimisation and increasing profit of the
company Nisa manages its safety of food and products integrity and makes sure that its supply
chain is working efficiently so that customers get assured that quality of product is good and not
compromised and company create a balance between quality and price. Also, company works on
government legislation which include food hygiene and health safety (Quattrone, 2016). It uses
price optimisation model by including promotions, competition prices etc.
The essential requirements of price optimisation which are considered by Nisa are analysis of its
competition, management of its performance, segmentation of its price and management.
Advantage Disadvantage
It increases the profit of the company and gives
competitive advantage from different
companies as when the prices are low
customers get attracted towards the products
and sale increases.
It relies totally on technology which is not
always reliable. It collects historical data which
may or may not be correct.
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Management accounting reports and its uses
These reports are used by the company to make decisions and plan and formulate
financial plan and to measure the performance of various layouts and plans which were
implemented (Rikhardsson, 2018). Most of the decisions which are complex in nature are taken
into taking consideration with these reports. Managers of the company analyse these reports and
change them into relevant information. The reports are -
Budget report – These reports are written documents that consists of various budgets in
order to compare actual cost with estimated cost. It help owners of company to examine
performance of the company and it enables the manager of the company to examine the
performance of different departments with their respective budgets and also help them to
compare the coast of each department. The budget report shows that the overall budget was
higher or lower than the estimated cost. In Nisa, all the departments have specific budget with
specific estimated cost which help the manager of the company to see and evaluate the
performance of the company.
Accounts receivable report – This report manages flow of cash when a company extend
the period of credit to the customers (Horton, 2018). These reports include the time duration of
credit owned to customers by the company. These reports can be segregated according to the
numbers of delayed days. These reports help the company to find out the defaulters if any and
also give an indication to the company that whether it need to strengthen the credit policy or not.
In Nisa, the term of credit offered to its customers is 14 days and accordingly the reports are
prepared to maintain the proper data of creditors.
Job cost report – These reports contains cost of the specific project or process. To check
if its profitable, the company compares the cost and revenue generated by the particular project
and get the results (Latan and et.al, 2018). Nisa invests its amount in promotional activities as
well as advertising, in every 3 weeks it promotes its product which lead to increase in its revenue
and hence the job costing report of Nisa shows positive results.
Inventory and manufacturing report – When a company manages and keep physical
possession of the inventory, it can use inventory and manufacturing reports to make the
management of inventory more efficient and to reduce its cost. It includes costs of overheads,
wastage in inventory, and also cost of labour according to hour (Hiebl, 2018). After making this
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report a company can compare and evaluate the results and can focus on the improvement of
following areas. In Nisa inventory and manufacturing report consists of the data of retailers
based on web that enable orders to be placed in any hour of day direct via internet by customers.
Nisa manufactures more than 800 products which allow retailers to have benefit of selecting
from wide range of selection based on the requirement of customers in their area.
TASK 2
P3. Calculation of absorption and marginal costing
Income statement as per marginal and absorption costing (refer appendix 1)
On the basis of appendix 1, it is interpreted that the difference in profit of Nisa
organisation is 70,000 (120000-50000) under the methods of absorption costing and marginal
costing. It is due to the elements of fixed factory overheads which is included in the valuable of
opening and closing stock. Thus, it is analysed that the net profit under the method of absorption
costing will not be same in the calculation of marginal costing because of difference in stock
valuation, over or under absorption of overheads. It is the main reason because of which profits
under the both calculation will be different. Under the marginal costing stock of work in progress
and finished good are valued at only marginal cost and in absorption costing such values are
valued at cost of production where fixed cost is also included. Hence, reason behind difference in
profit is because of valuation of stock which are done at lower figure in marginal as compared to
absorption costing.
Marginal costing and absorption costing
Marginal costing – For every additional unit of output or product that is produced, an
additional cost is added to the production of that output known as marginal costing. In marginal
cost, variable cost which keeps changing is known as product cost whereas the cost which is
fixed like rent is referred to fixed cost. In this only variable cost is considered in the
manufacturing of product. It calculates the profit incurred in the sale of product by profit volume
ratio which means by dividing profit generated to volume of the product. Simply it is the cost of
next unit produced and do not consider closing stock and opening stock of the company.
Absorption cost – This cost includes both fixed cost and variable cost as the cost of the
product. It considers the expenses and cost of production department as well as selling and
distribution, in short it considers the cost of complete production cycle. In this there is always
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fixed cost included which affect the profit in a negative way and decrease it. It implies cost of
each unit. It is appropriate for tax reporting and financial information.
The main reason behind differences in the profit of marginal and absorption costing is the
consideration of fixed cost. In other words, unlike marginal method, under absorption costing
both fixed and variable cost is considered while making assessment of production cost (Marginal
v/s absorption costing, 2018). Thus, in the modern era, absorption costing method presents better
view of profit as it assumes fixed production cost can be recovered through sales.
TASK 3
P4 Advantages and disadvantages of tools used in budgetary control
Budgetary control is a framework where financial budget is made by the company and set
financial goals and compare the estimated performance with actual performance.
Tools used to control budget in the company are -
Zero base budget – It is used by companies when they want to control their cost on
some specific project. It plans the cost for project without which a project's performance will
suffer. In this tool, all expenditures done by company must be mentioned. It starts from zero and
take it as a base and then each expense is analysed on its cost and requirement of occurrence in
the company. It helps in reducing the cost of the company as it compares the budget expenditure
of previous year with next year. In Nisa, zero base budget is used when new stores or outlets get
open by company or the company need to do research and development on its existing product to
save the cost.
Advantage Disadvantage
 It reduces the chance of error and
mistake as it consider every aspect and
starts from zero and it is cost effective
in nature.
 It is a detailed approach and tool to
control budget as it considers process
and study it thoroughly and lead to
effectiveness and efficiency of work.
 Knowledge and planning of the cost
 This process is really very complex to
understand as it includes detailed study
and interpretation of issue which can
only be done by professionals.
 This process is also very time
consuming and needs a lot of time to
review and check the project.
 It focuses on the attainment of long
term and short term objectives.
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behaviour of the organisation will be
enhanced.
 It responds to the changes in the
environment.
 It leads to the increased staff at all the
management levels.
 Highly managed skills are required to
prepare this budget.
 Ranking the activities performed
becomes difficult.
Cash budget- This tool is used to see whether the company has liquidity of cash or not,
to operate. It enables a company to see is future position in cash. It tells a company about
generation of cash in future from different operations. It is kind of presentation of cash in the
company. It includes cash from all the sources whether it is income or non-income. In Nisa, cash
budget is used when the company wants to predict position of cash in different time frames. It
helps the company to know cash requirements for its future projects like software development
or technology updation.
Advantages Disadvantages
 It helps in controlling position and
liquidity of cash to deal with various
business activities.
 It facilitates the information in relation
to the cash position of the company.
 Provide proper planning and allocation
of the cash related inflows and
outflows.
 It facilitates the good planning for the
financial budget.
 It just shows the cash position and
requirement but ignores the time of
cash flows.
 Manipulation in the figures leads to the
incorrect results of the cash flows.
 Ignores the credit and the accrual
aspects of the company.
 It avoids to include the time value of
money and other qualitative aspects.
Operating budget – The budget that include all the revenue and expenses and includes
variable as well as fixed cost which affect the business. This budget also consists of expenses
that are operating in nature which can be loan interest, non-cash income etc. This items help the
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company to evaluate its operating profit and income. In Nisa, the accountant and financial
manager produce monthly reports to see and compare their operating budget so that they can
compare and control their cost and can increase their gain.
Advantages Disadvantages
 It provides company with more
financial freedom and leads to
flexibility when company spend money
on projects as it provides clear picture
of company's income and profit.
 It helps to ascertain the sales and the
production budget.
 Facilitates the planning of the required
resources and making use of optimum
resources.
 Leads to effective and efficient
operations.
 Assists in measuring the performance
of the organisation in terms of the sales
and production.
 Provides information regarding the
achievement of the sales target and the
production target.
 The allocation of fixed money on
departments can create a problem and
can create biases and detailed
estimation of sales and revenue can
lead to time consumption.
 Only provide information regarding the
sales and operations and ignores the
other resources.
 Forecasting becomes difficult as it
includes the estimated figures.
 Incorrect valuation leads to the vague
results relating to the performance.
Financial Budget- It is the budget that is prepared to forecast and predict the receipts and
expenditure of the company on the short-term and long-term basis. It includes both cash and
capital income and expenditure. Effective cash budget enables the financial budget in knowing
the cash inflows and outflows to achieve the target in the right direction. The organisation frames
this budget to manage the income and expenses and can keep control over the cost and expenses
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so that profits of the company increases. It gives the business a better control and efficient
planning to manage the inflows and outflows of funds.
Advantages Disadvantages
 Facilitates the information regarding
the cash position.
 Helps in maintaining and planning of
the income and expenses.
 It provides measures for controlling the
cost so that higher profits can be
achieved.
 It assists in taking long term and short
term decisions.
 Incorrect figures and results of cash
budget leads to lack of accuracy in the
financial budget.
 Only figures out the data regarding the
income and expenses and not the other
resources of the firm.
 Estimated data leads to the inaccurate
results for forecasting.
Program budget- this budget is prepared for a particular project or program. It includes
information in relation to the expenses and revenues of a specific project.
Advantages Disadvantages
 It helps in demonstrating the steps of
the project that in what manner the
project will be implemented.
 It assists in managing the uncertain
event in the future regarding the
project.
 It enables the company in knowing the
areas where huge funds are required.
 An incorrect evaluation can lead to
increase in cost and company faces a
huge amount of loss.
 It is considered as the time consuming
budget as lot of information is required
and lot of points are there which need
to be addressed effectively and
efficiently.
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TASK 4
P5. Comparing how organisation are adopting management accounting systems to respond to
Financial problems.
Management Accounting System helps in evaluating, monitoring, analysing, identifying,
interpreting and communicating information to management of organisation for making
important business decisions for better attainment of organisational goals (Tappura, S., and et.
al., 2015).
The management accounting system used for solving financial problems are as follows:
Benchmarking - It is a type of market research which every organisation used for
comparing the existing business processes and performance level with the standard business
practise and measures adopted by other organisation. It helps the organisation in evaluating
current business position and analyse the area requiring improvements (Rahimnia, and et. al.,
2016). It emphasises on measures to be taken for improving the quality of business processes and
production, efficiency level, individual and team performance level by adopting new ideas,
thoughts, concepts, methods, procedures as used by other organisations for better attainment of
organisation goal and achieving maximum profits & high performance level. It also helps
organisation in seeking competitive advantage .Benchmarking helps the company in comparisons
from another which allows them to determine how well they are performing so that they can
develop better and new strategies. This is ongoing process in which company seeks to
improvement in their practices to match with the changes which is required by the organisation
to take into consideration.
Key performance indicators - It is a tool for measuring the qualitative as well as
quantitative value of an individual and organisation performance and growth level. It helps in
evaluating the progress or success of an organisation. It also emphasises on the success of
performing a particular task or activity in which the organisation is involved. Key performance
indicators is basically a quantifiable measure which is used by Nisa (UK based organisation) for
assessing, monitoring and tracking business processes, strategies and procedures used. It ensures
how timely, effectively, accurately and properly the organisation is working towards the
achievement of its key business objectives (Parmenter, D., 2015). Business unit can easily solve
financial problems pertaining to sales, market share etc by using such tool.
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Balance scorecard - It is a system for measuring the performance level of an
organisation and individual employee as well and also takes into consideration the business
processes, financial problems and its effective solution for such problem, growth and progress
strategies, customer feedback for the betterment of organisation. It helps in monitoring different
perspective of business operations such as return on capital employed, operating income,
percentage of market share acquire in different targeted areas, customer as well as employee
satisfaction and their retention, cost of production involved, growth and progress level achieved
by the organisation (Humphreys, K.A., and et.al., 2015). A balance score card focus on 4
different aspects for measuring an organisation health viz. Learning & Growth, Internal business
processes, Financial and Customer. Thus, it can be presented that by using this tool company can
solve both financial and non-financial problem.
Financial governance - Financial governance is defined as the way by which a company
gathers, manages, analyses, monitors, controls and evaluate the financial information of the
company. It emphasizes on how different companies assess and tracks their financial
transactions, monitor and manage business performance, control data transparency, ensuring
compliance of necessary applicable laws, rules and regulation, business operations & procedures,
and make disclosures about relevant information to its investors and other stakeholders. A good
financial governance ensures that financial data collected is fair, accurate and correct. It
generally focuses on internal business processes, financial policy, data security and tracking
thereby identifying the risk associated (Theriou, N.G., 2015).it helps in tracking the financial
transaction of the company, manages performances and control data so that organisation can
work effectively. Through this tool, firm can assess discrepancies which in turn takes place in
company’s process, strategies and rules.
Here the organisation named "Nisa" is using benchmarking approach for solving its
financial problems as benchmarking is a process which evaluates the current business position
and analyse the areas which is required to be improved for better attainment of organisation goal
and achieving maximum profits & high performance level. It also helps organisation in seeking
competitive advantage by improving the quality of its business processes and minimising the
cost of production by adopting new ideas, thoughts, concepts, methods, procedures. On the other
hand, organisation name "Qbic Hotel" use Key Performance Indicator for resolving its financial
problems as it helps the organisation in evaluating that what kind of business actions or plans
11

will be successful and what mechanisms should the organisation follows to achieve such success
or progress.
CONCLUSION
The report concludes the methods of management accounting and their importance and their
implementation in the company with their advantages and disadvantages. It studied different
reports of management accounting which helped the company to make decisions in order to
increase its profit and market share and also to formulate policies of the company. It described
marginal costing and absorption costing along with the calculation to have a better understanding
of the company's monetary values. The report also concluded the methods and tools of
controlling budget which helped the company to evaluate its cash, non cash expenditures and
incomes with the context to the company. At last it showed management accounting systems to
solve financial problems of the company with the help of different systems.
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APPENDIX
Income statement using marginal and absorption costing
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