Management Accounting: Definition, Importance, and Systems

This article provides an overview of management accounting, including its definition, importance, and different systems used. It explains the role of costing in setting prices and discusses various types of management accounting reports. The content covers topics such as cost accounting system, inventory management system, job costing system, and price optimization system.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................8
TASK 3..........................................................................................................................................13
TASK 4..........................................................................................................................................15
CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18

INTRODUCTION
Management accounting is considered as the procedures of facilitating financial data as
well as resources to managers. It is also called the managerial accounting. Moreover, it is the
practices to find, measure, evaluate, interpretation and communicate financial data for pursuing
the objectives of company (Liff and Wahlstrom, 2018). This practices is essential as it acts as a
bridge among function of finance as well as another aspects of business. Management accounting
is related with methods of obtaining qualitative as well as quantitative data for producing internal
reports. It plays crucial role in respect of managing firm's inside activities and functions. As per
the given scenario, the chosen company for this report is ABC Ltd., which is a medium size
manufacturing firm. This report covers the explanation of management accounting, kinds of
management accounting system and reports, computation of income statement using costing
techniques, benefits as well as drawbacks of several forms of planning tools that is utilised for
budgetary control. Apart from this, identification of financial problems and how management
accounting system responds to that issues are also discussed in this report.
MAIN BODY
TASK 1
Management accounting- It is an accounting system that is aligned in the process of gathering
monetary and non monetary data with an aim of producing internal reports of various aspects
(Fleischman and Parker, 2017). On the basis of these reports, managers of companies take
corrective action for success of business entities.
Definition of MA-
According to CIMA (charted institute of management accountants), “The term MA is a
systematic process of finding, evaluating, accrediting, analysing, preparing and interpreting of
information needed by management to plan and control in a business entity.”
Management accounting system (MAS)- The term MAS can be defined as a kind of system that
a business entity uses in order to measure and assess process for management. These systems are
linked with various aspects of companies in order to better management.

Importance to integrate accounting systems within a business entity:
There are vital range of accounting systems that are aligned with various activities of
business. Basically, this is crucial for business entities to apply a suitable accounting system with
different kind of departments. Such as in the aspect of chosen business entity, ABC limited their
manufacturing department is linked with inventory management system in order to better
utilisation of available raw material.
Origin, role and principle of MA:
Origin- The origin of MA can be traced since last 300 years when it was firstly used during time
of industrial revolution (Kerr, Rouse and de Villiers, 2015). This accounting was evolved after
the evaluation of financial accounting. Though, in current time period this accounting is not
compulsory for business entities to apply.
Role of MA- This accounting is very useful for companies in the aspect of vital range of
department. It has below mentioned roles that are as follows:
 Beneficial in planning- It is essential for all types of businesses to make effective plan for
futuristic activities. In this aspect, MA plays a key role by providing key information
regards to business transactions which are acquired by managers. In the above ABC
limited company, their managers make effective planning by help of this accounting.
 Beneficial in controlling- Along with the above mentioned benefit, another role of this
accounting is to control various kind of activities in an effective manner. Such as in ABC
limited company, they control their different operations of manufacturing by help of this
accounting.
 Beneficial for decision making- As well as the MA is useful for companies' managers in
order to take corrective decisions. It becomes possible by providing detailed information
regards to different elements of business (Cooper, 2017). The managers of ABC limited
take accurate decision by help of this accounting.
Principles of MA:

 Influence- It is a kind of principle of MA which defines that communication provides
insight of business entities. In broad manner, the MA is useful for communicating
information about monetary and non monetary aspects.
 Relevance- As per this principle, the information that is provided by MA should be
relevant to transactions of business entities.
 Value- This principle states that MA is useful for analysing impact on value. It is so
because each segment of information of this accounting play an important role for
business entities.
 Credibility- Stewardship formulates credibility that plays an important role in process of
making decisions lot more purposeful (Morillo et.al 2015).
Difference between MA and financial accounting:
Basis MA Financial accounting
Compulsory This accounting is not essential for
business entities in order to apply.
While this accounting is compulsory
for companies to apply in management
of financial activities.
Purpose The main purpose of this accounting is
to help internal stakeholders like
managers in better decision making.
It is important for both internal and
external stakeholders for getting
information about financial position.
Preparation of
reports
Under this reports are produced without
any specific format.
On the other hand, in this accounting
financial statements are prepared
according to rules of IFRS.
Various types of management accounting system:
As there are several kinds of management accounting system such as cost accounting
system, job costing system and other which are used by ABC Ltd. Company. Some of them are
discussed below:
Cost accounting system: This considered as the types of managerial accounting system
that is related with procedures of anticipating many forms of practices as well as operations. The
main intent of this system is to minimise as well as handle whole expenditures of organisation.

Moreover, it is crucially required through firms for delegating financial resources into its
operations according to the anticipated expenditures of several activities. Therefore, ABC ltd.
can utilise cost accounting system as it assist their manager to approximate the product cost for
analysing profit, valuation of inventory and cost control.
Inventory management system: This is defined as the aggregation of two activities that
are observing as well as maintenance of stored stock into storage warehouse (Monden, 2019).
The storage things may be the raw material, assets and many others. This is crucially required
within firms through production departments in order to develop effectual decisions related to
manufacturing. Therefore, it is utilised by ABC Ltd. as inventory management system assists its
manager in managing several stock items, keeping records of all stocks and others which
enhance their potential and profitability in effective and efficient manner.
Job costing system: This is considered as the forms of managerial accounting system that
is linked with finding revenue as well as expenses through every task which is delegated to
several practices. It is mostly utilised in that kinds of organisation in which manufactured goods
portfolio is bigger. So, with the help of this particular system manufacturing division can get
knowledge regarding every single unit that re manufactured. Mainly, the main benefits of this
particular system is that this enables managers in computing profit upon specific jobs which
delegates upon many enterprise practices. Therefore, the ABC Ltd. can utilise job costing system
to know about the cost of single job that is included into several practices.
Price optimisation system- As name assists, it is a kinds of accounting system that is
involved in detailed systematic procedure of identification of customers' requirement about
products' price and its utility (Brustbauer, 2016). By this accounting system companies become
able to get a vital range of data about market trend and customers demand. Basically, this
accounting system is essentially required by companies in order to make modification in prices
of products and services. On the basis of it, price of products and services are set by businesses.
In the aspect of above chosen business entity ABC limited their sales department makes changes
in strategies regards to pricing as accordance of customers' demand.
Benefits of various kinds of systems:
Name of accounting system Benefits
Cost accounting system This is useful for companies in order to prevent unwanted expenses

of operations in an effective manner. In the above respective
company, ABC limited their finance managers are utilising key
information through this accounting system in order to measure
effectiveness of each monetary aspect. It helps them in controlling
over unnecessary burden of cost.
Stock management system It is useful for companies in the aspect of keeping control over
activities of purchasing, selling and consumption of goods. Same
as in the above ABC limited company, their manufacturing
department applies this accounting system with an objective of
optimum utilisation of stored materials.
Job costing system This is beneficial for computing cost of each produced output by
assigning cost of job separately. The finance manager of ABC
limited company gather information of total cost of job involved in
various activities and on the basis of cost of each unit is computed.
Price optimisation system It is crucial for businesses for setting price of products and services
at a sufficient level. The sales department of ABC limited set price
of produced products on the basis of gathered data from secondary
research about customers' demand.
Presentation of financial information:
Why information should be reliable, up to date and accurate:
The accounting information should consists following features that are as followings-
 Relevancy- The accounting information should be relevant to business transactions so
that accurate decisions can taken. In the absence of relevant data, managers can not take
right actions.
 Up to date- In the business entities transactions are done on a daily basis, thus this is
important to make modification in accounting information.
 Accurate- In addition, the information should be accurate because any error may leads to
huge financial lose for companies (Meidell and Kaarbøe, 2017).

Why the way in which the information is presented must be understandable:
The way in which information presented should be understandable because this
information is utilised by different stakeholders of businesses. Such as the managers take critical
decisions on the basis of this accounting information and if it will not understandable to them
then they will not be able to take correct action.
Various kind of managerial accounting report:
MA reports are kind of reports that are produced by accountants in order to detailing
information of various elements of financial & non financial terms. There are some kinds of
reports such as:
 Budget report- It is a report that is contains detailed information regards to projected
amount of income & expenditures as well as value of variation that occurs by making
comparison with actual outcome. On the basis of it, managers take further step in order to
operate different kind of activities. Such as in the ABC limited company, their managers
utilise key information through this report and take right decisions.
 Performance report- This is a kind of report that is produced by accountant containing
information about each employees and activities performance. The purpose of this report
is to helping managers so that they can take decision about growth and progress of their
employees. In the above company, their managers take corrective actions about
promotion of their employees.
 Cost report- It is a report which consists information about estimated and actual
expenditures (Tucker and Leach, 2017). Along with data about variation in cost is also
mentioned under this report. The purpose of this report is to helping finance department
in order to analyse about evaluation of each activities' cost. In the ABC limited company,
their managers take corrective action about overall expenditures.
TASK 2
Micro economics techniques:

Cost- It can be defined as value of money that occurs in process of producing any commodity or
delivering services. There are different kind of costs such as fixed cost, variable cost, direct-
indirect cost etc.
Cost analysis- It can be defined as a process through which actual occurred expenditures are
measured in a systematic manner.
Cost volume profit analysis- It is a kind of analysis that is being used for assessing how changes
in cost and volume can effect companies' incomes.
Flexible budgeting- This is a type of budgeting that has nature of change as volume or cost
fluctuate.
Cost variances- This has been defined as difference between actual occurred cost and estimated
cost (Cowton, 2018). If actual cost is less then estimated then it will be favourable condition. On
the other hand, if actual cost is more then this will be considered as adverse condition.
Absorption costing- This is a type of costing in which cost of a product is calculated by taking
fixed and variable cost fully absorbed.
Marginal costing- It is a kind of costing technique in that variable cost is charged to unit cost and
fixed cost to period cost. This is being used for preparation of income statements by accountants.
Product costing:
 Fixed cost- It is a kind of cost that remain constant whether quantity of produced units
increase or decrease.
 Variable cost- This cost is different from above mentioned fixed cost. It is a type of cost
that changes in proportion to change in quantity of production.
 Cost allocation- This can be defined as a kind of systematic process that is related with
process of identifying, aggregating and allocating costs to particular objective.
 Normal costing- It can be defined as a kind of cost that is occurred in actual in the
process of completing different types of activities and operations.
 Standard costing- It is a type of cost that is estimated not occurred in actual. The
projection of this cost is done as accordance to last years' accounting informations.
 Activity based costing- This is a type of costing in that different activities are identified
in order to assign cost to each activity regards to production and services (Mahmoudi
et.al, 2017).

Role of costing in setting price-
The costing plays a significant role in aspect of setting price of products and services.
This is so because price is set by adding profit amount in total cost of production. For example in
the aspect of above ABC limited company, cost of a particular unit is of £20 then price will be of
£25. Herein, the price is set by adding £5 in actual cost of produced unit.
Cost of inventory:
Inventory cost- This is a cost that includes different kind of expenditures such as cost of
ordering, holding the inventory as well as cost of purchasing. There are various kind of inventory
costs such as:
 Ordering cost- This is a kind of cost that occurs in the process of creating an order to
supplier for purchasing of products. For example cost of processing the supplier invoice
regards to an order is considered as ordering cost (Brewer and Noreen, 2015).
 Carrying cost- It can be defined as a type of cost that is incurs in the process of holding
total inventory. This cost consists cost like warehousing cost such as rent, wages etc. As
well as financial cost like opportunity cost and many more.
 Stock out cost- This is a cost that is linked with lost opportunity incurred by fatigue of
inventory.
Benefit of reducing cost of inventory for businesses:
This is essential for business entities to keep the cost of inventories lower as much as
possible. It is so because if cost will lower then companies will be able to make effective
utilisation of available inventories. As well as lower cost of inventories may be helpful in order
to gain higher amount of revenues.
Inventory valuation method:
Last in first out method- It can be defined as a kind of method in which stock that bought in last
is being used first in order to produce units.
First in first out method- It can be defined as a kind of method in which stock that bought in first
is being used first in order to produce units.

Weighted average method- This is a type of valuation method that is used by companies in order
to determine cost of units which are basically the same (Kenyon and Kenyon, 2016).
Calculations:

TASK 3
Budget- This can be defined as a projection of future income and expenses so that monetary
resources can be applied to activities in an effective manner. There are different kind of budgets
such as:
 Cash budget- This can be defined as a kind of budget which includes information about
estimated cash receipts and payments during a particular time period. Under these cash
inflow and outflow various kind of activities are included such as collection of revenues,
receipts from loan etc. So overall, this budget is type of budget which helps in making
projection of future cash position of companies. In the above ABC limited company, their
financial manager produce this budget which helps in estimation of future cash regarding
activities.
Advantages- This is helpful for companies in providing actual liquidity position time to time.
Disadvantage- Its main limitation is that due to this companies can not expand over the
estimation which leads to loss.
 Capital budget- It is a budget which is linked with the evaluation of long term investment
of companies (Gray and Alles, 2015). Under long term investment various kind of
activities are included such as purchasing of land, building etc. Along with, this budget
provides framework for purchasing and selling of large assets. Like in the above
company, ABC limited they use it for making long term investments.
Advantages- It helps in selection of those investments which are beneficial for companies.

Disadvantage- Preparation of this budget is quite expensive which is not affordable to small
companies.
 Operating budget- It has been defined as a type of budget which presents an
organisation's estimated income and expenses for future time period. In this budget, each
activity's projected cost and profit is included. In the above company, they prepare this
budget in evaluation of each operational activity.
Advantage- It is beneficial for effective management of current and future expenses.
Disadvantage- Some times wrong estimation of future income and expenses can lead to huge loss
for companies.
Behavioural implication of budget:
 Participative budgeting- This is an approach of budgeting in which both superior and
subordinates involve in process of preparation of budgets.
 Budgetary slack- In this managers of business entities fail to estimate income and
expenditures in a corrective manner.
Pricing strategies:
 Penetration strategy- In this strategy, prices of products and services kept low by
companies in order to create a brand image.
 Premium strategy- Under this strategy, price of products and services kept higher by
companies in order to gain competitive advantage (Ruch and Taylor, 2015).
How do competitors determine their prices:
The competitors of business entities set price of products and services as accordance of
activities of rest of companies as well as by proper research regards to customers need and
demand.
Supply and demand considerations:
Supply- It can be defined as value of commodities which a company manufactures, and
willing for providing to customers (Jones, 2015).
Demand- It can be defined as value of commodities which customers want to buy from
seller during a particular time period.

Common costing system:
Standard costing system- It is a kind of system in that cost of products and services are
estimated on the basis of past financial activities.
Strategic planning:
SWOT analysis- It can be defined as a kind of technique that is being used by companies in order
to assess strength, weakness, opportunities and threats (Cazier and Wilson, 2015). This tool has
limitations and benefits that are as followings:
Advantages- This can be beneficial for assessing a particular supply source and business process
in an effective manner.
Disadvantage- One of the key drawback of this tool is that it focuses on subjective analysis. Rest
of other factors are ignored under it.
TASK 4
Financial problem- It can be defined as an issue in that companies do not have enough amount of
funds in order to complete different kind of activities. There are some kinds of monetary issues
are mentioned such as:
 Lack of sales revenues- It is an issue regards to monetary aspects in which companies'
total value of sales start to decrease. The cause of this issue is lack of selling activities in
the business. In the above ABC limited company, they are facing this monetary issue.
 Higher expenses- This is a type of monetary issue in that companies' revenues decrease
by huge gap as time passes while expenditures increase significantly. Due to this,
business entities face the problem of lack of monetary resources (Corvellec, 2018).
Identifying monetary issue:
 Benchmarking- It is an approach in which companies' monetary aspects are compared
with competitive business entities in order to find actual issue. In the above company, this
approach is used by managers for finding actual monetary problem.
 KPI- This is a way of managing performance of both financial and non financial aspects
(Albanese, Andersen and Iabichino, 2015). Under it, those activities are highlighted that

are causing as more revenues or expenses compare to estimated targets. It is useful for
management of short term performance of companies.
 Budgetary targets- Under this method, compare between actual income & expenditure
and estimated targets is done so that variation can be find out. If actual expenditures are
more estimation then companies become able to find out exact issue and prepare plan in
order to resolve it.
Financial governance- It can be defined as a systematic process of gathering, analysing and
managing financial information in an effective manner so that monetary issues can be controlled.
This can be used as a way of preventing monetary issues as it consists all financial
records of a business entity and on the basis of it companies become able to find alternatives to
sort the issues.
As well as financial governance acts as monitoring strategy for companies because of
detailed information of entire monetary aspects. Due to this, companies become able to find out
those monetary aspects whose performance is getting lower.
Comparison of companies:
Basis ABC limited KEF limited
Monetary issue The company is facing the issue of
lack of sales revenues. Due to this
issue, they are not able to invest
funds on rest of activities because of
lower amount of funds.
The company is facing the problem
of higher amount of expenditures.
As a result their total revenues are
felling down and not able to beat
their competitors.
MAS The managers of above company are
using “Price optimisation system”.
This is so because by help of it, they
are revising prices of their products
according to customers need. By
doing so, their sales units are
increasing and issue has been sorted.
They are using, “cost accounting
system”. It is so because, this
accounting system manage all
financial resources in a systematic
manner and track the performance
of each activity. Due to it, they are
able to keep expenses lower and

thus their monetary issue is sorted.
Management accounting skills:
Characteristics of effective management accountant-
 Strong knowledge of accounting concepts- A better accountant should have complete
knowledge of different accounting concepts and policies.
 Effective communication skills- In addition, an accountant should have effective
communication skill so that accounting information can be communicated to managers
(Hoque, 2018).
These skills can be useful in order to prevent monetary issues because if accountants will have
strong basis of accounting then they can guide to managers to corrective steps in the case of
monetary errors.
Effective strategies and systems:
In order to timely presentation of reports, companies are needed to develop strategies. For
this they can make plan as accordance of IFRS such as preparation of financial statements before
end of accounting period.
CONCLUSION
On the basis of above project report this has been articulated that MA is critical for all
kinds of business entities. Under the report different MAS like cost accounting system, price
optimisation system etc. are concluded along with their roles for companies. Furthermore,
various MA reports are described such as cost report, budget report etc. As well as P & L
accounts are prepared according to given data. In addition, different kinds of budgets like cash
budget, operating budget etc. are concluded. In the end, role of MAS in sorting out financial
issues is mentioned.

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