Management Accounting and Essential Requirements

This article discusses the importance of management accounting in evaluating financial performance and making strategic decisions. It explores different types of management accounting systems such as price optimization, job costing, inventory management, and cost accounting. It also highlights various management accounting reports like inventory reports, cost accounting reports, performance reports, and accounts receivable aging reports. The integration of management accounting systems and reporting with the company's process is also discussed. Additionally, the article covers the benefits and drawbacks of planning tools in financial management.

MANAGEMENT
ACCOUNTING

INTRODUCTION
The MA is as significance as financial accounting. It can be defined as a different part of
accounting in that internal reports are prepared for internal stakeholders (Cooper, 2017). These
reports can be prepared only by this accounting because it consists monetary and non monetary
information. In today's context mostly organisations are implementing this accounting because of
its increasing importance. With the use of it, managers of companies can evaluate the actual
financial performance that helps in preparing competitive strategies and plans as well as in
major decision making. For better understanding of it, BAM construction limited company is
selected which is basically a civil engineering company. It is located in London and deals in
small, large construction projects. The project report contains two activities in which, first
activity describes about management accounting systems and reports as well as income statement
is produced as per given information. Further, in second activity planning tools and role of MA
systems to solve the monetary issues is included. Along with solution of given practical parts is
mentioned.
ACTIVITY 1
PART (A)
Management accounting and essential requirement of different accounting method.
Types of MAS:
 Price optimisation system- This is a part of management accounting that is related to
sales department of companies. It is so because this provides a detailed information
regarding to consumer's feedback at different price (Jacobs, 2012). With the help of it
companies can fix price of produced items on that customers can be satisfy. Such as
above BAM construction limited company, they operate in wide range of construction
projects and they determine the expected price of their civil engineering projects with the
help of it. This helps them a lot because as per their customer's reaction on various prices
they set the estimated price. Hence, it is essential for companies to draw an effective
pricing pattern which can benefit to companies as well as can satisfy the customers.

 Job costing system- This is associated with finance department of companies (Guthrie,
Parker, 2014). In this, various cost such as labour cost, material cost etc. are estimated
and calculated. By implementation of this organisations can assess the total cost of their
various kind of jobs allocated to multiple operations. Such as in BAM construction
limited company, there are vital range of labour cost, material cost etc. All these costs are
being managed by above accounting system. So overall, this is essential to companies for
proper management of cost in the various operations.
 Inventory management system-In this system, a detailed track record of various kind of
stocks like WIP stock, raw material, finished commodities etc. is included. Along with
under it, the information related to how much quantity of material is consumed and how
much is remaining. On the basis of it, companies' production department takes crucial
decisions. Herein, the context of above selected, BAM construction limited company
their contractors use this accounting that helps them in effective allocation of raw
material in construction projects. It is essentially required in organisations for two
purposes which are keeping track record of materials as well as for taking important
decision in relation to production and purchasing.
 Cost accounting system- This is associated with finance department of companies
(Mussnig, 2013). In other words, this accounting system forecast and calculate actual
amount of cost that occur in multiple operations. The primary objective is to keep total
cost of various activities under control as much as possible. With the effective
implementation it, organisations can evaluate about how much cost will be occurred in
production of one unit and on the basis of it they try to keep below forecasted amount.
Such as in the BAM construction limited company, their finance department is using this
accounting system to track the difference between actual and estimated cost. Thus, this
accounting system is essentially required by companies to keep the cost below budgeted
cost.
Various kind of MA reporting.
MA reports are written document which are prepared as per the organisation's
quantitative and qualitative transactions of a fixed time period (Harrison and Lock, 2017). These
reports are being used by managers of companies as they take important decisions on the basis it.

Additionally, these reports are presented only to the internal aspects of companies not to
external parties. BAM construction limited company, their management accountant produces
different types of reports to help their managers and some of them are mentioned below:
 Inventory reports- In these reports information regarding to quantitative aspects of
various kind of stock including prepared goods, WIP is included (Evans, Burritt and
Guthrie, 2013). This type of report is very important for production department because
with the help of it, they manage entire production process. The importance of this report
is not limited till the production department but also it is useful for minimising the cost of
storing the materials in warehouses. Such as in the BAM construction limited company,
their accountant is preparing this report which includes information related of raw
material like cement, iron, concrete etc. for compilation of any civil project.
 Cost accounting report- This is a report which is linked with finance department. This is
so because in it, information related to the cost of each activity is included. Its importance
can not be ignored by companies because in the absence of it they will not be able to
forecast total cost as well as actual occurred cost. Such as in the above BAM construction
limited company, their management accountant produce this report which helps in
evaluating cost of different civil engineering projects. In addition, on the basis of it, they
make estimation of their projects.
 Performance report- It is prepared on basis of aspect of performance of various aspects
such as estimated financial goal and actual performance (Schaltegger and Zvezdov,
2015). As well as it is aligned with evaluation of actual position of company in front of
stakeholders. In addition, this helps to managers in determining efficiency of their
employees separately. Such as in above company, they are preparing this report for
managing the financial performance of different engineering projects. Along with this
report is almost necessary for them to prepare just because they are engaged in dealing
large construction projects. With the help of it, they assess the growth of their projects.
Apart from it, this report is not limited till the financial performance of projects but also it
evaluates performance of employees separately.
 Account receivable ageing report- This may be defined as a kind of report which is
prepared by accountant to help the finance department so that it can be evaluated that
how much amount is due and overdue by debtors. By use of it, organisations can make

their financial plan for future activities because on the basis of it they can assess total
expected fund which is required to collect from debtors. In above organisation, they are
preparing this report with an objective to analyse their debtors. In addition companies can
identify those debtors who do not make payment even after the expected date. It overall
helps in computing the total payable interest amount by debtors.
Advantage of MAS and their application in context of companies.
Each type of management accounting has some importance in the aspect of companies. It
depends on organisations that how they use these accounting systems to get benefit. Such as in
the above company, they have implemented multi-pal types of accounting systems whose
importance are as:
 Importance of cost accounting system- This accounting system has its importance for
finance department of any type of organisation (Soltes, 2014). It is so because by this
companies can allocate their funds in a better way so that expenditures can be eliminated.
Along with, by assessing useful from this accounting system managers can get reliable
information regarding to each units' cost. Like in the BAM construction, this is benefiting
them in management of cost of their various construction projects.
 Importance of price optimisation system- It has its importance in the context of sales
department of any kind of company. This is so because firstly it gather customer's
opinion on price segments and after that determines prices of products & services. Apart
from it, if companies do not apply this accounting system in their operations then it may
lead to decrease in total sales units. Like in the chosen company, they estimate the price
of their construction projects with help of it. In addition, it is also helping them for better
satisfaction of their customers because if they will provide products and services on
affordable prices.
 Importance of inventory management system- This is beneficial for companies because it
is linked with production department. With the help of it organisations can assess the
need of material for further. In the BAM construction limited company, they manage
their inventories such as iron, cement, concrete, bricks, stones etc. with the help of it.
 Importance of job costing system- This helps in assessing cost of job which is aligned in
different operations. Basically, the key benefit of above accounting system is to offering

complete information to managers of companies about each activity's cost. As
accordance, they prepare their plans and strategies which are implemented into current
operations and activities. Herein, this is important to know that it is useful for those
business entities wherein different units are produced. In BAM construction limited, they
trace the cost of various job like labour, supervisors in any construction project.
Integration of MAS and reporting with process of companies.
The integration of both MAS and reporting is linked to the process of companies (Sisaye
and Birnberg, 2012). It is so because each type of MAS and reporting has link with the various
department of organisations. Such as in the above BAM construction limited company, different
types of MA like cost accounting system is aligned to finance department for proper allocation of
funds. As well as price optimisation system is linked to the sales department and inventory
management system with production department. It stats that systems of MA is aligned with the
organisational process. While MA reports, like cost accounting reports have interrelation with
evaluation of financial position as well as other reports also aligned with other activities of above
company. So MAS and MA reports are integrated within company's process.
PART(B)
ANNEX(A)
Question 2.
(A) Profit statements under marginal costing principles:
Marginal costing- Under this costing system, profit statements are prepared by taking fixed cost
as periodic expenses (Sedevich Fons, 2012). While variable cost as cost of product.
1) 1st quarter (contribution & profit/loss)

(B) Profit statements under absorption costing principles:
Absorption costing- Under this costing system, fixed and variable costs are considered as cost of
product and absorbed completely (Rankin, Stanton, McGowan, Ferlauto and Tilling, 2012).
1) 1st quarter gross profit and net profit/ loss:
Income statement by absorption costing method(1st quarter)
PARTICULARS
AMOUNT
(in £)
SALE (4500x95) 427500 427500
C.O.G.S. -231750
G.P 195750
UNDER/OVR ABSORPTION 6800
G.P. 202550
LESS- FIXED EXPENDITURE -45000
NET PROFIT 157550

2) 2nd quarter gross profit and net profit/ loss:
Income statement by absorption costing method(2nd quarter)
PARTICULAR
AMOUNT
(in £)
SALE (3000x95) 285000
COST OF GOOD SOLD -180250
G.P. 104750
Under ABSORPTION -5476
G.P. 99274
LESS- FIX EXPENDITURE -45000
NET PROFIT 54274
Working Note:

ANNEX(B)
Question 1.
(a) Conventional absorption costing using a labour hour absorption rate:
(a) Labour hour: -
Product X = £6000x1 = £6000
Product Y = £8000x2 = £16000
Labour hour = £2,64,000
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1x12 = 2x12
= 12 = 24
Total Overheads = £6000x12 = £8000x24
= £72,000 = £192,000
(b) Using activity based cost approach: -

Management accounting techniques to produce financial reports
MA techniques help in preparation of financial statements. Such as in the aspect of above
annex(a), income statements are prepared as per absorption and marginal costing. As well as in
annex (b) activity based approach and absorption hour rate is applied to compute given
problems. It shows that management accounting techniques are important to prepare various kind
of financial reports.
Interpretation of produced financial statements.

On the basis of above financial statements, it can be analysed that in annex(a) profit
statements are produced as per absorption and marginal costing techniques. On the basis of
marginal costing method, net profit is of £150750 according to marginal costing method. While
according to the absorption costing method, net profit is of £157550 for first quarter. Along with
in second quarter, net profit is of £54274. While, in annex(b), labour hour for product X and Y
is of £264000 and rate is of £12 per hour. Total overheads are of £72000 and 192000 for product
X and Y. Additionally, under activity based approach, total cost for product X is of £82749 and
for product Y is of £181255.
ACTIVITY 2
PART (A)
Benefits and drawbacks of planning tools.
This is a technique that manages financial progress of companies as per setting different
kind of budgets. In general, budgetary control consists a wide range of planning tools such as
cash budget, capital, static, variable budget etc.
 Capital budget- It is a budget which provide guidance to companies for making long term
investment as well as assess the effectiveness of huge capitalized projects. Such as the
BAM construction company deals in large construction projects and for them this budget
is very crucial. This is so because as per it, they evaluate the effectiveness of large capital
invested projects. As well as they take decisions about investment in large projects
according to this budget.
Advantage- It is beneficial for companies in understanding the different kind of risks
which involves in any project. Due to this organisations can make profitable decisions.
Disadvantage- This budget makes an estimation of future risks of investments but
sometimes estimation can be wrong. It is so because future is uncertain and any change in
economic condition can make estimation totally wrong.
 Operating budget- This is a kind of budget that contains completed information regarding
to the estimated revenues and expenses of different operations (Rieckhof, Bergmann and
Guenther, 2015). This budget is prepared by companies for a particular time segment.
The selected civil engineering company, BAM construction limited they allocate their

financial resources in different construction projects as per the projection done by this
budget.
Advantage- This budget is helpful for proper management of current expenditures and
income. Along with it is important for creating financial reserves from profits which
exceeds the budgeted limit.
Disadvantage- This budget's drawback is that it takes too much time in preparation. As
well as it is not so effective in allocations of expenditure.
 Cash budget- This is a budget that includes information related to activities which have
their link with cash generating and outing (Storey, 2014). With the help of this budget
companies can evaluate their liquidity position. Such as in the BAM construction limited
company, their financial managers ensure the availability of cash for their working
capital requirement.
Advantage- This budget helps to the companies in evaluating the deficits which arises
due to lack of cash. Along with, it also important for improving the liquidity position of
companies.
Disadvantage- Its drawback is the strict control over spending and due to this sometimes
companies fail to grab the opportunities.
So these are the planning tools of budgetary control which have some advantages as well
as drawbacks.
ANNEX (C)

Role of planning tools in the aspect of preparing and estimating of budgets.

Cash budget, capital budget, static, variable etc. are some types of planning tools of
budgetary control (Chandar, Collier and Miranti, 2012). Each planning tool has its importance
for preparation of budgets. Such as in the above selected organisation, BAM construction limited
they are using all the budgets that is resulting as an important framework to prepare the budgets.
It is all possible only because of financial activities which are included in various planning tools.
Without implementation of proper planning tools, it can be tough to company to produce budgets
accurately.
PART(B)
Comparison of two companies to sort out from monetary issues by implementation MAS
effectively.
Financial issue- In today's competitive environment, it is important for companies to
identify and resolve the financial problem as soon as possible (Edwards and Boyns, 2012). Under
the financial problem organisations fail to run their activities due to lack of fund. This situation
becomes worst and worst as time passes. There are a wide range of financial issues that are faced
by companies and some of them are mentioned below:
 Poor liquidity position- The liquidity position of companies is required to be strong
because it is linked with availability of cash. If a company will not have enough cash then
it can be difficult to fulfil the working capital requirement. Such as in above BAM
construction limited company, their financial issue is lack of cash to pay small amount of
expenses. The cause of this financial issue is uncontrolled expenditures.
 Lower sales- The main cause of arising this issue is the ineffective prices of products and
services. Generally, customers buy from those companies wherein prices are affordable.
Due to this financial issue, companies' profitability start to decrease and other issues
arises.
Identifying financial issues:
 Ratio analysis- This technique of finding financial problems is based on analysis of
various kind of ratios. Such as in the BAM construction limited company, their financial
is identified with help of calculating and analysis of liquidity ratios. This ratio includes,
current ratio and quick ratio.

 Key performance indicator- This can be defined as a kind of technique in which
profitable and non profitable activities are assessed to find out actual financial issue. On
the basis of it, higher number of non profitable activities can be cause of financial
problem.
Financial governance- This can be defined as a monitoring strategy which focuses on financial
transactions of companies to solve the financial problems. In the aspect of BAM construction
limited company, it helps them to act as pre-method to overcome from financial issue.
BAM construction limited Vs Bennett Construction to solve the financial problem by
management accounting:
Basis BAM construction limited Bennett Construction
Financial
issue
This company's financial issue is
regarding to poor liquidity condition. It
is resulting as ineffective management
of working capital requirement. This is
so because cash is an important
element of working capital. As well as
due to this financial issue they are
unable to pay their short term debts
which is effecting their reputation.
The above company's financial issue is
related to lower sales which is resulting
in lack of profitability. As well as due to
this, their financial position is becoming
weak and they are not able to sustain in
the competitive environment.
Technique to
find
financial
issue
The company's financial issue is being
find out with help of ratio analysis
technique. With the help of it, they
calculate various ratios like current
ratio, quick ratio etc.
Their financial problem is identified by
implementation of KPI technique that
focuses on those activities which are not
generating revenue. As well as these
activities are being considered as cause
of financial problem.
Management
accounting
system
The company's financial issue is
resolved by cost accounting system. It
is a type of system that helps in
controlling the expenditures as much
This company's financial issue is
resolved with the help of price
optimisation system. It is so because this
accounting system helps in keeping the

as possible. The above company used
this accounting system to focusing on
those activities which are causing for
poor liquidity position. With the help
of it, their financial problem is
resolved in less time and in an
effective manner.
prices at a level which is acceptable by
both customers and company. With the
implementation of this accounting
system, they set the price of their
projects affordable that helped them in
increasing sales. Hence, their financial
issue is resolved by price optimisation
system.
MAS to solve the monetary issues.
In this competitive environment, there are less number of companies which are not facing
financial issues, otherwise mostly companies are facing different types of financial problem. In
this aspect, management accounting plays a significant role because its different types of system
have feature to overcome any kind of issue. Such as above mentioned two companies: BAM
construction limited and Bennett construction limited have different financial issues that are
solved by implementation of two different accounting systems. In the aspect of BAM
construction company, their issue of poor liquidity condition is solved by cost accounting
system. As well as in Bennett construction limited company, their financial problem of lack of
profitability is identified by KPI and solved with the help of price optimisation system. It
indicates that both companies had different financial issues but solved by effective
implementation of MAS.
Planning tools of accounting to respond against financial issues which leads to success of
companies.
The planning tools have similar impact on monetary issues as MAS have on financial
issues (Bragg, 2012). It is so because multi-pal types of planning tools like cash budget,
operational budget and capital budget consists detailed information about financial transactions
of an organisation. Due to this, it becomes easy for organisations to assess actual monetary
problems and possible method to overcome. It can be seen in the above civil engineering
company, BAM construction limited that they are applying different types of planning tools like
cash budget, operational budget and capital budget etc. which are helping them to raise above
from financial problems.

CONCLUSION
On the basis of project report, this can be articulated that MA is becoming an important
part of organisational process after evaluating its interrelation with other department. The report
further conclude about various type of MA like cost accounting system, job costing system, price
optimisation system etc. Along with its requirement in companies is also concluded. As well as
different kind of MA reports and their interrelation with process of selected company is included.
Further, in the report annex (a,b,c) are solved in which income statements are produced and
project X&Y' s effectiveness is evaluated by help of different appraisal methods. In the end, role
of planning tools and MAS in context of solving financial issues is described by comparison of
two organisations.

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