Functions of Management Accounting and Different Types of Management Accounting System

This article discusses the functions of management accounting and different types of management accounting systems. It also covers the advantages and disadvantages of different types of budgets and the process of preparing a budget.

Management Accounting

Contents
Introduction.................................................................................................................................................3
Task 1..........................................................................................................................................................3
A) Functions of management accounting................................................................................................3
B) Different types of management accounting system.............................................................................5
Task 2..........................................................................................................................................................5
1. Marginal costing..................................................................................................................................5
2. Absorption costing...............................................................................................................................7
Task 3..........................................................................................................................................................8
A) Advantage and Disadvantage of different types of budget.................................................................8
B) Process of preparing budget................................................................................................................9
C) Pricing strategies..............................................................................................................................10
Task 4........................................................................................................................................................11
A) Balance Score Card..........................................................................................................................11
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13

Introduction
A cost accounting system is a system of accounting used by the manufacturers to account
for manufacturing activities carried by the manufacturer under perpetual inventory system. Thus
it can be said as the accounting system designed for the manufacturers to record the flow of
inventory through various stages of production (Gullifer and Payne, 2015). A typical cost
accounting system records the inflow and outflow of the materials at each stages of the
production. Whether it be in work-in-progress it should be properly accounted for. Present report
is based on Imda tech limited which produces mobile charger and other gadgets for retail outlets
in UK (Hecht, 2016). Current assignment will discuss the function of management accounting. It
will explain cost accounting system, inventory management system. It will calculate the
Absorption cost and marginal cost. In addition, report will describe the balance score card
approach.
Task 1
A) Functions of management accounting
Management accounting whole process depends on 4 basic function of Management like
1. Planning, 2. organisations, 3. Controlling and 4. Decision Making. Explaining in details
function of Management accounting they are:
1. Planning: Planning is preparation done in advance before execution to achieve some specific
goal (Horngren and et.al, 2010). It may be short term or long term. A budget planning is type of
financial planning shows how scarce resources to be maximal utilised over specific period of
time. Management accounting is interconnected in financial management and budgetary system
as whole because budgeting control depends on developing of financial reports which helps in
providing information to manager to take decision in financial controlling. Planning reports help
manager to estimate the effect of alternative options available on firms ability to achieve desirer
goal (Kaplan and Atkinson, 2015). If business enterprises target specific profit in one financial
year they they should also determine how they can achieve them.
2. Organising: It is process of establishing organisational framework and assigning
responsibility to the people working in organisation for achieving business goals and objective.

Organisational structure differs from business to business or an enterprise to enterprises. In
business different department can be assigned to by setting up divisions, departments, sections
and branches (Quattrone, 2016).
3. Controlling: It is a process of monitoring, measuring, evaluating and correcting the actual
results to ensure that a business enterprise goal and planning is achieved or going to be achieved
or not (Saladrigues and Tena, 2017). Controlling is accomplished with feedback, feedback is
process to take corrective measures been taken to evaluate or correct steps while implementing
plan.
4. Decision Making: Decision making is process of choosing best alternative among various
ones. Decision Making is inherent in all three functions of management like Planning, organising
and controlling (Weygandt, Kimmel and Kieso, 2015). A manager cannot plan without decision
making and have to choose among different alternative the best one which meet goals as early as
possible. Following are process of decision making:
• Identifying a problem requiring managerial actions.
• Specifying the objective or goals to be achieved.
• Choosing alternative coerce of action.
• gathering the information about sequence of Each alternatives (Zimmerman and Yahya-
Zadeh, 2011).
Importance of management accounting
Management accounting is very important for decision making. It assist in
determine the selling process of the goods. It examines the cost and try to ignore unnecessary
expenditure of the organization so that company can make effective control over the costs. It
determining the activities required for the production (Carlsson-Wall Kraus and Lind, 2015).
Management accounting is very important that helps in determine the production activities. With
the help of this company like Imda can make effective decision and can make profit to great
extent. It is the great tool that assists in reducing cost of the organization. Budget is the major
part of any business. With the help of management accounting Imda ltd can improve its cash
flow to great extent. That is the great technique that assists in getting effective financial returns.

With the help of this companies can forecast demand and supply and can make production
accordingly (Alyousef and Mickan, 2016).
B) Different types of management accounting system
Actual Costing : Actual cost accounting is the recording of the products cost at different factors
enable for it. Be it actual cost of material, actual cost of labour, actual overheads cost occurred,
allocated according to the actual quantity of product (Gul, 2014).
Standard Costing : Standard cost accounting system is the process of substituting actual cost
with the estimated cost and then identifying the difference between the actual costs and estimated
costs and then identifying the variances (Tucker and Parker, 2014).
Normal Costing : It is the method of tracking production costs on the basis of the estimated
prices of the inputs multiplied by the actual quantity of the inputs used.
Inventory Management Systems
Inventory management system is a continuous system of moving parts and products in and out of
the organisations premises (Ismail, Ramli. and Darus, 2014). Organisation's inventory is
managed on a daily basis as they shipped out their products to their users or customers and also
place new orders for the products. Thus that is called Inventory Management Systems.
Job Costing Systems
Job costing system is a process of accumulating costs which are been associated with a specific
production or a specific service (Cescon, Costantini and Rossi, 2013). The information provided
in job costing system should be accurate as the information provided their in and prices quoted
for different products should allow for a reasonable profit.
Price Optimising Systems
Price optimising system is a system where there is use of mathematical analysis by a company to
determine how the users of the products react on the different prices of it's products and through
different channels (Zimmerman and Yahya-Zadeh, 2011).
Task 2
1. Marginal costing
It is the management accounting system that is used by organization in order to
prepare their income statements. Marginal costing is the system in which direct material,
labor and variable production costs are included and company ignore the fixed expenses.

At the time of net profit calculation company deducts variable expenses and fixed
expenditures from the actual income in order to know the net profit of that year (Kaplan
and Atkinson, 2015).
Sales revenue 52500
Less: Cost of goods sold
Direct labor 7500
Direct material 12000
Variable production
overheads 3000
Cost of goods sold 22500
Gross profit 30000
Less: variable expenses
Variable selling expenses 7875
Total variable expenses 7875
Contribution 22125
less:Fixed expenses
Fixed selling expenses 10000
Fixed production overhead 15000
Total fixed expenses 25000
Net profit -2875

2. Absorption costing
It is one more type of management costing technique that is used by the organizations to
calculate their net income (Saladrigues and Tena, 2017). In this type of costing companies taken
into considerations all type of direct and indirect expenditures.
Sales revenue 52500
Less: Cost of goods sold
Direct labor 7500
Direct material 12000
Variable production
overheads 3000
Fixed production overhead 15000
Cost of goods sold 37500
Gross profit 15000
Less:
Variable selling expenses 7875
Fixed selling expenses 10000
Total expenses 17875
Net profit -2875
From the above calculation it can be analyzed that cost of both of these methods are
differed from each other. The main reason of difference is fixed overhead cost. In the marginal
costing method fixed cost is ignored by the management whereas in the absorption it is essential
to include this cost for getting accurate results (Quattrone, 2016). Thus, it can be said that
absorption costing is the great tool, and supports in getting accurate results. Imda Ltd calculates
the per unit cost with the help of absorption costing. From the above calculations it can be

interpreted that marginal and absorption are two types of costing methods that can help in
preparing the income statement of the Imda Ltd. Cited firm uses marginal costing method and
absorption method in order to calculate its net profit for the year (Kaplan and Atkinson, 2015).
From the calculation of marginal costing, it can be said that direct material sum is 7500, direct
labor is 12000 and variable product s is 3000. On other hand cost of goods sold is 22500 so with
the calculation gross profit is found 30000. From the calculation it can be interpreted that net
profit is -2875. On other hand when cost is calculated by absorption costing methods then it is
found that direct material is 7500, direct labor 12000. With the help of this technique cost of
goods sold is found 37500. From the calculation sales revenues is found 52500. It can be
interpreted that cost of good cost is differed in both methods, in the marginal it is found 22500
where in absorption it is found 37500 (Carlsson-Wall, Kraus and Lind, 2015). The reason of
difference is that in the marginal only variable expenditures are being taken into account whereas
in the absorption costing method fixed and variable both expenditures are taken into account by
the management.
Task 3
A) Advantage and Disadvantage of different types of budget
Budget is one of the most important part of business, that helps in making effective
decisions for the well fare of organization. It assist in creating the strong business ideas and helps
in forecasting the future situation. According the give scenario Imda ltd wants to improve its
economic position for that company has to prepare the budget so that it can look upon its
expenditures and can minimize unnecessary expenditures of the workplace (Ismail, Ramli and
Darus, 2014). It is beneficial tool that supports in systematic planning.
Incremental budgeting
It is one of the essential tool in which Imda can make small changes in its already
available budget in order to prepare a new budget. In such type of method incremental amount
adds by the management. The main advantage of this budget system is that it makes sure little
deviation in the actual planning (Ismail, Ramli and Darus, 2014). With the help of this equality
will be remain in all department of Imda Ltd. On other hand it is not good for the cited firm

because there is no incentive format for making control over unnecessary costs. Perpetual
allocation of resources is another drawback of this budgeting system.
Zero based budgeting
It is another type of budgeting system in which zero is kept as base. In this proper market
research is done by the management and accordingly it allocate resources. It looks upon the real
market situation and accordingly run operations. The main advantage of this type of tool is that it
is based on real figures thus, decisions can be made accurate. Cost curtailment is another benefit
of this tool (Gul, 2014). But it is time consuming process and management requires lots of fund
for preparing the final budget. Apart from that if Imda Ltd follows this budgeting system then it
is necessary that cited firm hires skilled employees those who can deal with the budget
effectively.
Fixed budgeting
It is another type of budgeting system in which Imda has to analyses the business
performance and accordingly cited firm has to prepare fixed planning strategies so that it can
accomplish its objectives significantly (Ismail, Ramli and Darus, 2014). Accordingly
management can make planning and can take strategies decision which can support in
development of the company y to great extent. But this cannot be altered that is the drawback of
this technique.
B) Process of preparing budget
Budget is prepared by the organization by following systematic process, in the absence of
proper process good budget can not be prepared by the entities. It is as following :
 Update budget assumption: It is necessary to identify the current performance and
analyze assumptions. Company has to update budget assumptions in order to create
further operations.
 Review bottlenecks: It is the next phase in which capabilities of imda Ltd is identified
and accordingly investment decisions are taken by the cited firm (Kaplan and Atkinson,
2015).

 Available funding: After reviewing the bottlenecks organization has to look upon the
available funds. By this way they will be able to observe what else is required more.
 Step costing point: In this stage company has to look upon the costing point and they
have to define what amount will incurred for particular activity.
 Create budget package: In this cited firm has to update the entire budget package so that
decisions can be made related to allocation of resources.
 Issue budget package: once all information are gathered then they have to issue package
of final budget (Saladrigues and Tena, 2017).
 Obtain revenue forecast: It is essential for Imda Ltd is to obtain revenue forecast so that
future income can be identified and accordingly necessary changes can be made in the
budget.
 Obtain department budget: It is the next step in which company has to obtain department
budget and adjustment is required to be made.
 Obtain capital budget request: In this stage budget is send to senior level managers for
making updation (Weygandt, Kimmel and Kieso, 2015). .
 Update budget model: Higher authorities make changes and update the budget.
 Review the budget: Now Imda Ltd has to review the budget carefully so that mistakes
can be identified.
 Process budget iterations: Now it is the phase in which iterations are developed.
 Load the final budget: After all steps final budget is being prepared by the company and
it is presented in front of all stakeholders (Saladrigues and Tena, 2017).
C) Pricing strategies
Imda Ltd has to set its prices, for that they have to look upon the several factors such as
market demand, competition and product value. Pricing strategies of cited firm is interrelated
with the cost planning. Cited firm is using cost plus pricing strategy in which it includes all cost
and add its profit percentage in this. After that final prices is gained which is kept for the
products of the company (Quattrone, 2016). Price is set by the firm in order to gain high profit.
There are several pricing strategies such as premium, market penetration, economy, price
skimming, psychology and bundle pricing strategies. Cited firm includes all cost which are
incurred in the production and manufacturing. It is beneficial strategy and can support in
allocating funds to all departments. Imda Ltd makes changes in its prices as per market demand,

market position (Gullifer and Payne, 2015). These forces impact on the business performance ,
productivity and profit earning capacity of the organization to great extent. Correct pricing
strategy assist in gaining competitive advantage because it will attract t more people towards the
firm and they will buy the products of the entity. That would help in sustaining in the market for
longer duration. Apart from this pricing strategies assist in increasing profitability of the
organization to great extent.
Task 4
A) Balance Score Card
It is used extensively in business and in industry, government and non government
organisation to develop all business activities around vision and strategy of organisation,
helps in improving internal and external communication of business and monitoring
organisational performance against strategic goals (Hecht, 2016). It is strategic planning
and management system used in helping and monitoring organisational performance.
In this balance score card strategy is centric point based on organisational goal and
Financial, Customers, Learning and growth and internal process are four framework.
Balance score card is majorly used by government, non profit and big organizations. That
supports in increasing level of performance of the companies and develops their internal and
external communication to great extent. Imda Ltd takes support of balance score card in order to
minimize economic problems. It is the great tool that supports in improving business
performance of the cited firm (Weygandt, Kimmel and Kieso, 2015). From the financial
perspective it is very important. With the assistance of this method company can identify return
on their investments and can find out value of shareholders in the organization. It looks upon the
all areas and make effective strategies so that upcoming uncertainties can be avoided by the
entity. It makes relationship between various corporate programs. By this way quality of
products and customer service can be improved. That would support the Imda Ltyd in improving
its sales volume thus, it will support in resolving economic problems (Zimmerman and Yahya-
Zadeh, 2011). It supports in gaining competitive advantage and improving business decision of
the company. Thus cited firm can provide excellent services to its clients and they will be
satisfied. That would be beneficial for the organization and by this way Imda Ltd will be able to
give response to the financial problems. Balance score cards look upon the internal and external

position of the entity and try to find out the drawback. With the help of this cited firm will be
able to develop new strategies that can help in improving business performance of the
organization to great extent (Alyousef and Mickan, 2016). It is the disciplined way that translate
strategic intent of an entity into actionable programs. By this way Imda Ltd will be able to offer
consumers satisfactory products as per their demand. That would make them positive towards the
brand and thus, overall financial position of the cited firm will get strong.
Conclusion
From the above report it can be concluded that management accounting is an essential
part of business that supports in managing overall business operations in an effective manner.
Absorption and marginal are two types of costing that can support in preparing the income
statement of the company. Organizations have to use correct technique so that it can measure its
income and performance of the entity. Budget is one of the most important parts of management
accounting. By preparing effective budget firm can make effective control over its unnecessary
expenditures and can improve its profitability to great extent.

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