Understanding Management Accounting Techniques

Management accounting system : 1 MAIN BODY1 LO1 Understanding of management accounting systems 1 Evaluate the range of management accounting techniques1 Presenting financial information 2 LO2 Range of management accounting techniques4 Microeconomic techniques 4 Product costing manager 8 Cost of inventory |benefits 8 Pricing strategies 9 Common costing systems 9 LO4 Compare how organization respond to their financial problems by using management accounting systems 10 Identify financial problems 10 CONCLUSION 11 REFERENCES 12 INTRODUCTION Management accounting is the process of managing business operations and all

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
LO1 Understanding of management accounting systems ..............................................................1
Evaluate the range of management accounting techniques.........................................................1
Presenting financial information..................................................................................................2
LO2 Range of management accounting techniques .......................................................................4
Microeconomic techniques..........................................................................................................4
Product costing.............................................................................................................................8
Cost of inventory..........................................................................................................................8
LO3 Explain the use of planning tools in management accounting ...............................................8
Use of budget for planning & controlling....................................................................................8
Pricing Strategies.........................................................................................................................9
Common costing systems............................................................................................................9
LO4 Compare how organization respond to their financial problems by using management
accounting systems ......................................................................................................................10
Identify financial problems........................................................................................................10
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is the process of managing business operations and all the
relevant activities as well. It include various functions which helps the manager to gather
information and used in producing financial statement that used by stakeholders for further
decision making process (Bebbington, Unerman and , 2014). For the better understanding of this
concept, this report based on Pearson Education which is world's leading company over 40,000
employees and it operated more than 70 countries. This report cover various topics such as
concept of management accounting, its benefits and essential requirement in the organization to
achieve business goals & objectives.
Different methods of accounting reporting and it further used to produce budget for
budgetary control. In addition, it include costing methods which helps in calculating net profit of
the year. Along with this, identify financial problem which impact production as well as
profitability and analyse how accounting systems helps in resolving these issues.
MAIN BODY
LO1 Understanding of management accounting systems
Evaluate the range of management accounting techniques
Management accounting: It is also called managerial accounting which helps the
business through providing financial information and other resources in order to make decisions
(Boučková, 2015). It is used for internal analysis which make it different from financial
accounting and its main objectives is to take accurate decision and control over the business
activities.
Different types of management accounting systems:
Inventory management system: It is an combination of technology (software as well as
hardware) where it helps the manager to monitor or control inventory level. In order to
manufacture products of manage clients information they have to use this system which provide
them accurate information. It will be beneficial for decision making process and there are three
types of inventory management system such as LIFO, FIFO or AVCO. Pearson use FIFO system
to manage their inventory. It is essentially required by the company to minimise their workload
because it is very complex to physically manage all data and regular monitoring as well.
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Cost accounting system: This framework used by organization to estimate overall
product cost and it further beneficial in inventory valuation, cost control or profit analysis. It is
essentially required to identify which product are profitable which one is not. There two main
costing systems such as job order costing and process costing. Pearson can use any one costing
system to estimate their product cost which further help manager to formulate strategies in
respect of organization.
Price optimising system: This system help the manager to determine that how demand
will impact the price level of product. It is used to set price for the different segment of
customers (Carlsson-Wall, Kraus and Lind, 2015). It help the manager of Pearson to measure
customer behaviour regarding their price policy. They try to minimise product cost which
increase profit margin and helps in achieving business gaols & objectives. It required for develop
price, promotion strategy, forecast demand etc.
Benefits of management accounting systems:
Accounting systems Benefits
Inventory management
system
This software provide centralised database facility which helps
the manager of Pearson to access information anytime and
make effective decision accordingly. It will enhance
transparency, reduce labour or carrying cost, improve cash flow
etc.
Price optimization system In context of Pearson, this system help business to analyse
customer behaviour on different price range of products
(Chenhall and Moers, 2015). It help the manager to focus on
key areas such as margin of sales.
Cost accounting system It helps the manager of Pearson to estimate their product cost
and further they try to minimise their cost through regular
review. It helps in fixing product price, improve efficiency,
control over material etc.
Presenting financial information
Explain the methods which used in presenting financial information:
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There are various methods which helps the organization to present financial information
for stakeholder analysis. Some of it discussed below:
 Balance sheet: In this statement, assets and liabilities of the company recorded and make
sure that it will be balanced. With the help of it, organization able to identify financial
position of company and liquidity as well.
 Income statement: This statement include all the expenditures or revenues which related
to the business operations. It help the manager to analyse that operations are profit
making or not.
 Cash flow statement: In this statement, accountant record inflow or outflow of cash
from various activities such as operating, financial or inventing. It helps in categorising
inflow or outflow according to the task which further helps the manager to formulate
strategies.
Different types of management accounting reporting:
Performance reports: This report used to review performance of individual as well as
entire organization. With the help of departmental report, manager able to analyse their
performance and compare with others in order to measure improvement (Hiebl, 2014). Manager
of Pearson use this report for strategic decisions for the future. It further help in providing
reward or other incentives to the employees as per their performance.
Budget reports: Under this report manager produce policies and schemes which going to
follow at the time of performing individual task. Every organization develop overall budget
which specify the overall expenses for each task & activity. Manager of Pearson have to make
sure that, employees follow it properly try to perform under budget in order to maximise
productivity and profitability.
Cost managerial accounting reports: This report include all types of cost such as
material, labour, overheads etc. Cost report provide overall summary of expenses at the time of
performing business operations. In context of Pearson, with the help of this report manager
analyse the figures and build strategy to control cost over the production period.
Above mention reports used by the manager of Pearson in order to make effective
decision which helps in maximising profit through reducing cost and further helps in achieving
business goals & objectives.
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LO2 Range of management accounting techniques
Microeconomic techniques
Cost analysis: Under this method, actual cost will be compared with budgeted cost which
helps the manager to identify actual performance of each activity. It further helps in disclosure,
use these information in the financial reporting which helps in formulating future strategy.
Cost variances: It is the difference of actual cost from budgeted amount and it will helps
the manager to analyse its performance (Klychova, Faskhutdinova and Sadrieva, 2014). If it is
good then it will try to maintain or if it is not then manager have to take necessary actions to
complete task under standard budget. It is also called break-even analysis which is used to
identify break-even point of sales which helps in taking decision for organization.
Marginal costing: It is one of the costing method which used by organization to identify
each product cost. It help the manager to select least amount cost product and distributed among
customers. Under this method, fixed cost is fully written off against contribution.
Income of the year by using marginal costing method:
Year 1:
Particulars Notes Year 1
£ £
Sales 25,97,000
Marginal cost of sales:
Opening Stock -
Add variable production costs:
Direct materials 4,83,600
Direct labour 6,44,800
Variable overheads 8,06,000
Less closing stock 1, 2 1,53,600
Marginal cost of sales 17,80,800
Fixed manufacturing costs 65,000
Gross profit 7,51,200
Selling and distribution expenses 11,000
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Administration expenses 15,100
Profit /(Loss) from operations before interest and
tax 7,25,100
Interest expense 1,100
Profit /(Loss) from operations before tax 724000
Year 2:
Particulars Notes Year 2
£ £
Sales 28,77,000
Marginal cost of sales:
Opening Stock -
Add variable production costs:
Direct materials 5,78,400
Direct labour 7,71,200
Variable overheads 9,64,000
Less closing stock 1, 2 4,94,400
Marginal cost of sales 18,19,200
Fixed manufacturing costs 65,000
Gross profit 9,92,800
Selling and distribution expenses 11,500
Administration expenses 15,100
Profit /(Loss) from operations before interest and
tax 9,66,200
Interest expense 1,350
Profit /(Loss) from operations before tax 9,64,850
Year 3:
Particulars Notes Year 3
£ £
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Sales 42,77,000
Marginal cost of sales:
Opening Stock 4,94,400
Add variable production costs:
Direct materials 6,14,400
Direct labour 8,19,200
Variable overheads 10,24,000
Less closing stock 1, 2 19,200
Marginal cost of sales 29,32,800
Fixed manufacturing costs 65,000
Gross profit 12,79,200
Selling and distribution expenses 13,000
Administration expenses 15,100
Profit /(Loss) from operations before interest and
tax 12,51,100
Interest expense 1,600
Profit /(Loss) from operations before tax 12,49,500
Working Notes:
(1) Closing stock in units = Opening stock = Production – Sales
Year 1 = 0 + 40300 – 37100 = 3200 units
Year 2 = 3200 + 48200 – 41100 = 10300 units
Year 3 = 10300 + 51200 – 61100 = 400 units
(2) Closing stock in amounts = ( Unit sold / Unit produced ) * Total variable costs
Year 1 = (3200/40300) * ( 483600 + 644800 + 806000 ) = 153600
Year 2 = ( 10300 / 48200 ) * ( 578400 + 771200 + 964000 ) = 494400
Year 3 = ( 400/51200) * (614400+819200+1024000) = 19200
Absorption costing: This method include each and every cost which required to
manufacture product. This method include fixed as well as variable costs which means all types
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of cost such as direct or indirect. It will provide more accuracy which helps the manager to
formulate their strategy accordingly
Income statement by using absorption costing method:
Year 1:
Particulars Notes Year 1
£ £
Sales 25,97,000
Cost of sales:
Opening Stock* -
Add total production costs:
Direct materials 4,83,600
Direct labour 6,44,800
Variable overheads 8,06,000
Fixed manufacturing costs 65,000
Less closing stock** 1,2 1,58,761
Cost of sales 18,40,639
Gross profit 7,56,361
Distribution expenses 11,000
Administration expenses 15,100
Profit /(Loss) from operations before interest and tax 7,30,261
Interest 1,100
Profit /(Loss) from operations before tax 7,29,161
Year 2:
Particulars Notes Year 2
£ £
Sales 28,77,000
Cost of sales:
Opening Stock* 1,58,761
Add total production costs:
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Direct materials 5,78,400
Direct labour 7,71,200
Variable overheads 9,64,000
Fixed manufacturing costs 65,000
Less closing stock** 1,2 5,08,290
Cost of sales 20,29,071
Gross profit 8,47,929
Distribution expenses 11,500
Administration expenses 15,100
Profit /(Loss) from operations before interest and tax 8,21,329
Interest 1,350
Profit /(Loss) from operations before tax 8,19,979
Year 3:
Particulars Notes Year 3
£ £
Sales 42,77,000
Cost of sales:
Opening Stock* 5,08,290
Add total production costs:
Direct materials 6,14,400
Direct labour 8,19,200
Variable overheads 10,24,000
Fixed manufacturing costs 65,000
Less closing stock** 1,2 19707
Cost of sales 30,11,180
Gross profit 1265817
Distribution expenses 13000
Administration expenses 15,100
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Profit /(Loss) from operations before interest and tax 12,37,720
Interest 1,600
Profit /(Loss) from operations before tax 1236117
Working Notes:
(1) Closing stock in units = Opening stock = Production – Sales
Year 1 = 0 + 40300 – 37100 = 3200 units
Year 2 = 3200 + 48200 – 41100 = 10300 units
Year 3 = 10300 + 51200 – 61100 = 400 units
(2) Closing stock in amounts = ( Unit sold / Unit produced ) * Total production costs
Year 1 = (3200/40300) * ( 483600 + 644800 + 806000 + 65000 ) = 158761
Year 2 = ( 10300 / 48200 ) * ( 578400 + 771200 + 964000 + 65000) = 508290
Year 3 = ( 400/51200) * (614400+819200+1024000 + 65000) = 19707
Product costing
Product costing refer to those cost which required to manufacture products and it include
direct material or labour, factory overheads etc (Maas, Schaltegger and Crutzen, 2016). It also
consider the labour cost which helps in delivering service to the customers.
Cost of inventory
Inventory cost associated with a cost of carrying, storing, ordering inventory for the
purpose of production. So manager of Pearson have to reduce inventory cost which helps in
maximising profit margin. There are different methods of inventory management which can used
by the organization.
Different methods of inventory management and its effects on financial statements:
Last In First Out (LIFO): It is an inventory evaluation method where manager firstly
sold the last purchased item. This method very rarely used by the organization because there is a
high chances of wasting raw material which purchase for the first time.
First In First Out (FIFO): It is an another and mostly used method of inventory
valuation because it is assumed that first purchased item will be used for the first production
(Nielsen, Mitchell and Nørreklit, 2015). It helps in maintain flow of inventory without any
wastage.
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Average Value of Cost (AVCO): It is an simple method where inventory stored in single
place and used in batched. There is no separation of inventory on the basis of purchasing order.
Company use stock as per the requirement on average basis.
Pearson company follow FIFO method for inventory valuation which helps in reducing
cost due to minimum wastage and further helps in maximising profit margin of the product.
LO3 Explain the use of planning tools in management accounting
Use of budget for planning & controlling
There are various planning tools which helps the organization to manage their operational
activity and try to minimise product. Some of the budget discussed below:
Master budget: This budget is the combination of different functional area and it will be
prepare on quarterly or monthly basis (Quattrone, 2016). With the help of this, manager able to
analyse performance of each department and compare with others. Further strategies will
develop on the basis of their departmental performance.
Zero based budget: Under this method, all the expenses will justify again for every new
period and all the estimation of cost will be start from the “Zero Base”. It is very time taken
process because manager does not use any previous information to build this budget. But it helps
the organization to provide accurate information regarding expenditure or revenue.
Capital budget: This budget prepare for the evaluation of investment in particular
project. At the time of inventing any new project, business produce capital budget for the
requirement of finance from various sources.
From the above mention budgets, manager of Pearson follow capital or master budget
which helps the organization to identify departmental performance as well as requirement of
finance for the further investments.
Pricing Strategies
There are various types of pricing used by the organization and it will be depend upon
customers (Pricing strategies, 2019). Some of them mentioned below:
Premium pricing: Under this pricing strategy, company select high price for their
products and it will be beneficial for the industrial segment where competition is very high.
Difficult for other organization to entered in this market.
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Penetration pricing: In this strategy, business set low price for their products in order to
attract customer or quickly capture the market (Quinn and Jackson, 2014). Basically this strategy
used at the time of launching new product and most of money spend on product promotion.
Economic pricing: Price of similar products will be same for the different brands. Such
as company target the huge market so they set very nominal rate which is equal in comparison to
their competitors. Tea, detergent or other products price are epitome of this strategy.
Pearson Education company follow penetration pricing strategy because initially it is
very good for business to capture market share and attract potential customers.
Common costing systems
Job costing: It is a costing method which used to record manufacturing cost of product in
comparison to process. With the help of it, manager of the company regularly tack the cost of
each job and try to maintain for the accounting period which mostly related to the business
operations.
Process costing: This costing used to collect and assign manufacturing cost to the units
which going to produce in mass number. Because job costing used when one product cost is
different from another (Senftlechner and Hiebl, 2015). But, when business produce same product
in large quantity then they will use process costing.
LO4 Compare how organization respond to their financial problems by using
management accounting systems
Identify financial problems
Financial problems: It is the situation which every organization face once and it will
create pressure in the organization regarding money. When business face financial issues then it
become very difficult to survive. So manager have to prepare for it and in context of Pearson,
company also face some financial problems which discussed below:
Wastage of raw material: In the manufacturing unit, raw material waste due to high
purchase more then the requirement (Van der Stede, 2015). Wastage of material will increase
overall cost of product which reduce the demand and occur financial problem for the company.
Excessive outflow of cash: Due to high outflow in comparison to inflow will generate
financial issues and disturb the operational activities as well.
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Key Performance Indicator (KPI): It is a performance measurement tools which help
the to analyse how effectively business achieve their key objectives. Pearson company use to
evaluate success through targeting some indicators. It include financial or non financial
indicators.
Benchmarking: Under this technique, organization compare their performance with
industry standards and from their previous performances. The basis of measurements are quality,
time, cost, demand, needs etc.
Financial governance: It includes the various strategies, policies, standards etc. it will
helps the manager or workers who perform within organization (Zaleha Abdul Rasid, Ruhana Isa
and Khairuzzaman Wan Ismail, 2014). Each and every activity will going to perform as per the
financial governance. It further helps in reporting and discloser of accounts.
Difference between organizations that how they respond their financial problems by using
accounting systems:
Basis Pearson Education McGraw-Hill Education
Financial Problems Company face the problem
regarding waste management and
excessive outflow of cash.
Spend more amount on
promotion which provide high
cost of product.
Management accounting
system
In order to resolve financial
issues, company use inventory
management for waste
management and costing system
for excessive outflow of cash
(Weetman, 2019).
Manager of McGraw-Hill
Education follow price
optimization model to analyse
customer buying behaviour and
it helps in reducing over
expenses on promotional
strategies.
Accounting techniques Company use KPI technique
which helps in analysing
effectiveness of business
operations.
Manager use benchmarking
technique to compare their
strategics with other and further
decisions will take accordantly.
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