Management Accounting Principles and Practices

This solved assignment delves into key concepts of management accounting, covering topics such as cost classification (fixed & variable), different costing systems (absorption & marginal), job costing, and the role of management accounting in strategy formulation. It provides worked examples and explanations to illustrate these principles, aiding students in understanding and applying them effectively.

MANAGEMENT ACCOUNTING

INTRODUCTION
Management accounting (MA) is a concept through which an enterprise able to make
financial plan, implement, monitor and execute at the workplace in proper direction. Further, for
making internal business decisions also this mentioned aspect is one of the highly appropriate. In
the current project, Nisa Retail Store is taken as a base which is UK based small business
enterprise and operates in retail sector. Through the present assignment, systems and reports of
MA are described which help to take various decisions and accomplish reporting of MA in
effective direction respectively. Apart from this, for chosen company income statements (I/S) are
prepared after considering two major method i.e. marginal and absorption costing. Moreover,
planning techniques which are used for controlling budgets are evaluated with reference to Nisa
Retail store. At the end of project, systems of MA considered resolving wide range of financial
issues are explained.
TASK 1
P1 Describing MA and key needs of its several systems in Nisa Retail store
Business Report
From: Management Accounting Officer
To: General manager
Nisa Retail Store
Subject: Several systems of MA
A term which helps to every organisation in order to take those business judgements which are
fruitful and related to only internal environment is referred as MA. It comprises with several
numbers of systems and approaches which are implemented at the working place (Groot and
Selto, 2013). Some important systems of MA are explained below along with their necessities:
 Price optimisation system: In accordance to this system of MA, company makes
decision that which level of price of retail items is required to charge from customers.
Under this, all the pricing level are evaluated and then analysed that at which price
majority of the people gave response. Further, one particular price at the which products
sold in higher proportion as compared to others then that will be selected. Hence, to opt
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one specific price where more customers purchase products price optimisation system is
needed for Nisa Retail.
 Cost accounting: On the basis of this, expenditures which incurred in the company
within particular period of time like quarterly, half yearly etc. are computed.
Management of selected firm easily able to know amount of costing associated to
manufacture and sale goods and services at the workplace. Therefore, Nisa Retail
requires this system to analyse and compute total cost of production. On the basis of
this, judgement to apply one pricing strategy can be made profitably (Hald and Thrane,
2016).
 Job costing: Another system is job costing which is used for analysing costs associated
for producing and selling every product comes under one batch. As per the case of Nisa
Retail, it sales different range of goods like food, shoes, grocery, cloths etc. With the
help of job costing, chosen firm will become able to know that at which level of costs
products are sold in the market (The job costing system, 2015). Therefore, company will
become able to select one attractive price of the product for selling in the market and
enhance revenue at the end of year.
 Inventory management: At the last, it is necessary to manage available stock in the
company decline it. The reason is that if there is higher inventory remained every year
then it will affect capacity of generating revenue at the end of year. Moreover, higher
the level of this aspect leads to reduce stock turnover ratio of Nisa Retail store. Further,
essential necessity of this system is to manage stock and boost up turnover ratio in an
efficient way (Joshi and Li, 2016). While going to make valuation of inventory at the
business place of every firm basic three methods included. Such techniques of stock
valuation are like LIFO, weighted average as well as FIFO.
P2 Explaining methods which are used by Nisa Retail store for completing management
accounting reporting
Business Report
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From: Management Accounting Officer
To: General manager
Nisa Retail Store
Subject: Different reports come under MA reporting
A term various kinds of reports are made at the working environment and after clubbing them
financial statements are prepared is known as reporting of MA. In order to complete this stated
method wide range of techniques and aspects are taken into consideration in Nisa Retail.
Further, explanation of reports which are used for completing process of MA reporting is
mentioned below:
 Performance report: In order to measure performance of a company by considering
past or estimated and pre sent or actual information this stated report is used. Under this,
data from budgets are taken initially which are forecasted for the next accounting period.
Once the year completed then whatever actual data comes, compared with budgeted
information (Messner, 2016). If Nisa Retail store unable to perform well in industry then
corrective actions are to be taken by the firm. It is used for making required changes and
implement needed strategies so that performance will enhance in upcoming years.
 Accounts receivables ageing: As per this, sum of money which will be received in next
year of after sometimes is transacted in this type of report. Higher the amount of this
method shows that, Nisa Retail made more credit sales in the year as compared to cash
sales. Amount of total credit sales which incurred in one year is to be recorded in this
stated kind of report of MA. Further, total of this is treated in balance sheet as current
assets in form of debtors. As the management reduces credit sales and enhance cash
sales in one year then total of accounts receivable ageing report will decline.
 Stock management: Another report is related to stock which is used for managing as
well as declining total inventory available in the Nisa Retail store. When this factor
reduce on consistent basis then company able to raise stock turnover ratio and generate
high level of profit (Soheilirad and Sofian, 2016). It includes major two aspects which
are like closing as well as opening inventory. Total of this report treated under non-
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current assets of balance sheet of Nisa Retail.
 Segmental report: Apart from the above, as per this method, small reports are to be
made on the basis of department wise. For example: report of human resource, financial,
information technology, production, research and development etc. According to this,
cash payments as well as receipts incurred within one financial year in each segment are
recorded. Therefore, Nisa Retail can assess cash position of every organisational
function and analyse performance of it.
 Operating budget report: At the last, under this kind of reporting method each and
every income as well as outcome are recorded related to operation department. Apart
from this, it reflects amount of cash position which will be remained in the next year
from operating in market. In this, purchase of raw materials, labour charges,
maintenance of equipments etc. are involved (Vaivio, 2008). Total amount of this stated
report is treated in the books of profit and loss in terms of operating expenses. Further, it
helps to determine or calculate operating income generated at the end of financial year.
TASK 2
P3 Computing costs and preparing I/S using two costing methods
In order to formulate account of profit and loss at the workplace there are various
techniques considered by firm. As per the current scenario, Nisa Retail Store uses generally two
ways which are like marginal as well as absorption. On the basis of these two ways P/L prepared
below:
Formulation of I/S considering marginal costing:
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Formulation of I/S considering absorption costing:
From the aforementioned accounts it can be said that Nisa Retail store has ability for
managing costs incurred at the workplace. The reason is that as per both the statements, it
generates positive level of net profit (NP). As per marginal costing amount of NP is worth of
9300 GBP at the end of financial year. When looking at the second income statement then it can
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be said that, management of cited firm earns 9600 GBP as net income. It can be seen from both
the accounts that, amount of NP differs at same year and on the same sales revenue. Basic issue
behind this is that, both costing methods consist with different expenses. Marginal approach
consists with only variable kind of costs where any kind non-variable expenses not entertained.
On the another side, absorption method comprises with all the costs which are associated in the
firm. No matter that such expenditures are of which nature. Second approach is one of the most
used by Nisa retail because it supports to recover all kinds of expenses in proper way. On the
other side, if only marginal is implemented then selected retailer can recover only variable
expenses (Zimmerman and Yahya-Zadeh, 2011). Due to this kind of particular condition,
financial burden of fixed expenses will remain which directly affect to the net profit at the end of
fiscal year.
Differentiation between marginal and absorption costing
Marginal costing Absorption costing
As per this method, non-variable expenses are
not used where only variable costs are taken
into consideration while preparing I/S.
A method in which cost centre plays a major
role and considered all the costs is known as
absorption method of costing.
Costs incurred in this method are considered in
form of product cost. Further, fixed expenses
used as periodic costs at the workplace of Nisa
Retail.
Both kinds of expenditures i.e. fixed and non-
fixed terms as total cost of production in cited
company.
In this, overheads classified in only two
sections which are fixed and variable.
Here, overhead expenses segregated in
production, selling and distribution as well as
administration.
It highlights final account in form contribution
of every unit.
On the other side, it reflects amount of net
profit on every production volume.
Valuation of stock in accordance to marginal
costing is done at full cost of production under
the balance sheet (Surbhi, 2015).
Whereas, procedure of inventory valuation is
completed under balance sheet by taking base
of total variable expenditures incurred in
production of goods and services.
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It is considered for making wide range of
decisions within the working environment only
rather than external.
The costing method of absorption is acceptable
under International Accounting Standard (IAS)
2 which lies with inventory.
Apart from this, due to change in stock level,
profit level under this method gives positive
response.
While, between income in absorption method
and stock level there is adverse relationship.
Therefore, due to increasing inventory, profit
will decline with same proportion within Nisa
retail.
TASK 3
P4 Stating merits and demerits of several planning tools
For preparing any kind of financial plan in the business basically budgets are formulated
by the managers. For this, several planning techniques are to be taken into consideration within
Nisa Retail store which help in preparing all the budgets effectively. Further, particular tools are
zero based, fixed as well as incremental. Evaluation of these all the stated planning methods
along with some pros and cons are mentioned below:
Zero based budgeting
A budgeting technique which is started by having a base level of zero. Every department
of nisa retail will have to make a fresh start by making their budget zero. No any past records are
taken to make a budget using this method. With upcoming period it is decided what will be the
needs and costs required (Fullerton, Kennedy and Widener, 2014).
Advantages
 Top level management in Nisa can easily identify the area where there is a waste of
money.
 Through this the efficiency of various departments can be regulated as it helps in proper
allocation of resources in every field. The reason behind this is that ignorance of past
records and looking of actual figures. It helps in cost controlling by removing all unproductive activities and looking for new
opportunities. Communication and coordination in Nisa retail will also improve.
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Disadvantages
 A lot of time and effort is required for making a zero base budget. Oppose of new ideas
and changes may be developed within a manger. Department like research development may not implement this as it would be very
difficult to justify every expenses involved in it (Grabner and Moers, 2013).
Fixed budgeting
It also known as static budget where there is no change in budget even when the sales
volumes changes. It stats that it will not change irrespective of change in level of production or
expenditures.
Advantages
 As there are no changes made during a year it is very easy to implement and follow this
budget in Nisa retail.
 The retail store can make changes in its strategy by estimating its revenue and expenses
by altering it in coming year. It helps to Nisa retail to take smart decisions on how to control their costs.
Disadvantages
 Due to its lack of flexibility it resists the retail store to allocate additional resources for
further growth which will have negative an impact on revenues.
 As it operates on one degree of activity it is not useful for unpredictable activity. It is not useful for small business or constantly fluctuating markets where decisions are
taken according to market situation (Lee, 2011).
Incremental budgeting
A budget of current fiscal year becomes the base for coming year's budget. A fixed
percentage is increased every year in budget.
Advantages
 With greater amount of flexibility it allows for changing budget very quickly either in a
month or a year.
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 Helps in building value of equality among departments thus by avoiding conflicts
between various departments of the selected retailer thus by keeping everyone on same
page. As it is very simple to understand it allows to have stable budget every year and can
make gradual changes within Nisa retail.
Disadvantages
 It often leads to unnecessary spendings on funds by managers which encourages higher
spendings in next year.
 Method of working is same which leads to lack of new ideas and incentive for managers
and employees to reduce cost (Kotas, 2014.).
 It does not allow few departments in Nisa to take larger risk as funds allocated by the
firm may be insufficient.
TASK 4
P5 Comparing ways through which Nisa Retail consider system of MA
When Nisa Retail store operates in the industry then various kinds of problems come into
consideration and for solving them some tools and methods are applied. This project talking
about financial issues and for resolving them some systems of MA are used by Nisa retailer
which are such as follows:
MA systems Description of such systems for resolving financial issues
Financial governance It is one of the small part of corporate governance which helps to
analyse outcomes generated from using financial resources at the
workplace of Nisa Retail store. Higher the implementation of this
particular system is highly supportive to determine that employees are
giving response using resources in which manner. When the
management finds that workers are giving positive response and
generates targeted income by utilising resources in optimum way then
performance will be considered as better (Grabner and Moers, 2013).
However, if the firm unable to perform well in retail industry of UK
then financial governance will support to assess causes and find put
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possible solutions.
Budgetary control The system in which basically two kinds of information compared
which are like budgeted or expected and then actual figures which will
be incurred at the end of year. If Nisa Retail Store finds that its targeted
data not achieved which is like enhance net profit or decrease cost etc.
then reasons will be also easily identified in this. In addition to this, it is
widely considered system as compared to all the other mentioned in the
current scenario. The reason is that, only two information required
which can be compared by non-financial employees also in the firm. In
addition to this, it is very simple as well as easy system of MA for
applying in the business smoothly and analyse performance in an
effectual direction.
Key performance
indicators
A procedure in which some basic symbols are used to identify business
performance of Nisa store in the retail sector. Herein, two types of
indicators are applied at the working environment which are like
financial and non-financial (Baldvinsdottir, Mitchell and Nørreklit,
2010). In order to determine that in terms of monetary concept
management capable to perform well or not then financial KPIs are
used. Some KPIs which belong from financials are such as net income,
sales revenue, return on investment, cost or expenses etc. On the
another side, some KPIs to measure non-financial performance are like
quality of products and services, satisfaction level of customers,
enhance market share etc. This system of MA is beneficial for assessing
both kinds of the performance in the industry.
Balanced scorecard At the end, an approach which helps to measure generally four kinds of
the business performance of Nisa Retail store is referred as balanced
scorecard (BSC). Under this four perspectives involved which are like
financial, learning and growth, customer as well as internal business
process. Considering to only financial perspective, management of
selected firm able to measure that whether it performs well or not
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(Groot and Selto, 2013). Moreover, reasons and solutions while
incurring poor performance are also analysed effectively through BSC.
CONCLUSION
From the above stated report it can be articulated that, management accounting is highly
considered approach by every company for making effective business judgements related to
internal business environment. There are several systems of MA are used by Nisa Retail due to
essentially required in various ways. Such systems are like price optimisation, cost accounting,
job costing as well as the inventory management. Apart from this, in order to complete reporting
system of MA Nisa Retail uses some method which included segmental, accounts receivables
ageing, performance, operating budget and stock management. On the basis of this, it able to
formulate all the financial statements and analyse performance of firm in the industry. From the
computation part it can be analysed that, Nisa Retail store generates net profit worth of 9300 and
9600 GBP on the basis of marginal and absorption costing respectively. Further, some planning
methods like zero based, incremental and fixed budgeting are taken into consideration by cited
enterprise. At the end, BSC, KPIs, financial governance and budgetary control are used by Nisa
Retail for making fruitful solution of financial problems.
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REFERENCES
Books and Journals
Baldvinsdottir, G., Mitchell, F. and Nørreklit, H., 2010. Issues in the relationship between theory
and practice in management accounting. Management Accounting Research. 21(2). pp.79-
82.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2014. Lean manufacturing and firm
performance: The incremental contribution of lean management accounting practices.
Journal of Operations Management. 32(7). pp.414-428.
Grabner, I. and Moers, F., 2013. Management control as a system or a package? Conceptual and
empirical issues. Accounting, Organizations and Society. 78(6). pp.407-419.
Grabner, I. and Moers, F., 2013. Management control as a system or a package? Conceptual and
empirical issues. Accounting, Organizations and Society. 78(6). pp.407-419.
Groot, T. and Selto, F., 2013. Advanced management accounting. Pearson Higher Ed.
Hald, K. S. and Thrane, S., 2016. Management Accounting and Supply Chain Strategy. In 1st
International Competitiveness Management Conference.
Joshi, S. and Li, Y., 2016. What Is Corporate Sustainability and How Do Firms Practice It? A
Management Accounting Research Perspective. Journal of Management Accounting
Research. 28(2). pp.1-11.
Kotas, R., 2014. Management accounting for hotels and restaurants. Routledge.
Lee, K. H., 2011. Motivations, barriers, and incentives for adopting environmental management
(cost) accounting and related guidelines: a study of the Republic of Korea. Corporate
Social Responsibility and Environmental Management. 18(1). pp.39-49.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp. 103-111.
Soheilirad, S. and Sofian, S., 2016. A proposed model of the mediating effect of strategic
management accounting on the relationship between perceived environmental uncertainty
and firm performance. International Journal of Research–Granthaalayah. 4(1). pp.231-
239.
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Vaivio, J., 2008. Qualitative management accounting research: rationale, pitfalls and potential.
Qualitative Research in Accounting & Management. 5(1). pp.64-86.
Zimmerman, J. L. and Yahya-Zadeh, M., 2011. Accounting for decision making and control.
Issues in Accounting Education. 26(1). pp.258-259.
Online
Surbhi, S., 2015. Difference Between Marginal Costing and Absorption Costing. [Online].
Available through: <http://keydifferences.com/difference-between-marginal-costing-and-
absorption-costing.html>.
The job costing system, 2015. [online]. Available through:
<https://www.accountingtools.com/articles/what-is-a-job-costing-system.html>.
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APPENDIX
WORKINGS OF P3
Working Note 1
Fixed Production overhead absorption rate (OAR)= £1,800/600 = £3 per unit
Working Note 2
Working Note 3
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