Management Accounting: Importance and Issues

The assignment delves into the crucial role of management accounting in driving organizational growth and profitability. It highlights key financial issues like profit concerns, productivity challenges, and product/service quality impact on daily operations. The analysis emphasizes the urgency of addressing these issues to achieve future goals effectively. The report concludes that robust accounting systems are essential for generating returns, maximizing profits, and ensuring overall business performance.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Concept of management accounting and their essential requirements............................1
P2: Various types of accounting reporting system.................................................................3
M1: Benefits of using various accounting system..................................................................4
D1: Critical evaluation of using management accounting reports.........................................4
TASK 2............................................................................................................................................4
P3: Different types of costing method those are helpful in determining net profit for the
company.................................................................................................................................4
M2: Use of management accounting techniques....................................................................8
D2: Apply and interpretation information of business activities............................................8
TASK 3............................................................................................................................................8
P4: Advantage and disadvantage of using planning tools use in budget................................8
M3: Use and evaluation of planning tools..............................................................................9
D3: Critical evaluation to overcome financial problems......................................................10
TASK 4..........................................................................................................................................10
P5 Use of management accounting to respond financial problem.......................................10
M4: Analysis of various financial issues..............................................................................11
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Nowadays, it has been seen that plenty of business organisation has decided to make use of
management accounting systems in order to manage and control their everyday business
operations. This will assists managers of an organisation to record and analyse various financial
transaction those are being done by the company in an accounting year. The primary objective of
every organisation is to increase maximum profit by utilising resources of the company in more
efficient manner. By this, they can attain their short and long term aims and objectives so that
future targets can be attain in more effectively (Hilton and Platt, 2013).
This project reports is providing valuable information about management accounting and
reporting system. Understanding of various costing methods in order to determine net profit of
an organisation. Merits and demerits of using planning tools those are helpful in budgetary
control. Examination of financial issues and their effective measures to resolve those problems
that are affecting overall performance of an organisation.
TASK 1
P1: Concept of management accounting and their essential requirements
In every business organisation, whether operating as small or medium level need to record
their overall financial transaction by the help of using management accounting system.
Management always looks to have search for those aspects those are necessary for increase
productivity of “River Island company”. It is an important function of administration to make
use of accounting data for the purpose of making effective planning, organising, controlling and
evaluating their overall objectives. Whereas, accounting is a systematic recording of financial
information, summarise it and make proper posting into their respective statements (Ward,
2012).
Management accountings are known as profession that consists of partnering in effective
company decision making, devising strategies and provide expertise in financial reporting. This
is an effective process of analysing business costs and operations to prepare to prepare internal
accounting report, records and help managers to take vital decisions in order to attain their set
objectives.
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Basis Management accounting Financial accounting
Meaning This particular accounting is used
to provide relevant data to the
managers to make effective plans,
policies so that business would
operate in more proper manner.
Whereas, this accounting is assists in
focuses on preparation of financial
statements of an organisation to provide
the financial data to various interested
parties.
Necessity There is not necessary for an
organisation to make recording of
various accounting information’s.
It utmost important to prepare financial
statements to make use of various
accounting data.
Objective To assists management in crucial
planning and making decision
through providing detailed data on
different matters.
This would deliver financial data to
external parties to control outside
impacts.
Format It not specific for an organisation
to make a well systematic format
to record accounting data.
It is more crucial for every company to
make use of appropriate financial
transaction in their respective column.
Types of accounting system:
There is various accounting system that would help an organisation to analyse various
transaction that are done in an accounting period of time. Some of them are discuss underneath:
Cost accounting system: It is said to be the most crucial accounting techniques by which
company can easily locate of analyse their overall cost and expenses. These are those costs that
are directly or indirectly applicable over the production of products and services. There are
certain cost associated with this is normal, standard and actual costs which will helpful in
compares the performance by using budgeted values.
Inventory management system: As per this accounting system, manager can easily
make analysis of their overall stock position which is being kept by the company in their
respective warehouses. This will leads to determine overall bills, record of invoices or other
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stock related transaction those are done in their daily course of action (Wickramasinghe and
Alawattage, 2012).
Job costing system: It is one of the most effective systems which is used to measure total
assign product costs to an individual products or group. Generally, this happens to more vital in
respect of every manufactured product is relatively different from one another.
Price optimisation: This particular accounting system used to determine various types of
customer reaction regarding the price of products which is being set by the company. This will
assists them to analyse the price set must be helpful in increase their operational costs of
productions.
Benefits of using the above cost:
All those cost accounting system those are being discussed above will assist the
management to take valuable decision in order to gain maximum profit. This will also aids in
increase the efficiency of an organisation.
P2: Various types of accounting reporting system
In order to generate more effective outcomes for “River Island Company” it is crucial to
make use of reporting systems. The primary objectives of managers are to make sure that every
data those are being taken from every financial department must be record in their respective
format. Because, these reports are more crucial for the investors or other external stakeholder to
make analyse of company’s financial health. On the basis of that they use to decide whether to
make their capital investments under their projects. Some of them are discuss underneath:
Performance report: This is one of the vital reports which use to make comparison of
actual performance with the past one so that they can reach to an effective solution to generate
maximum profit during an accounting year. For this purpose management can use various
accounting such as Key financial indicators and other effective techniques.
Account receivable report: This report will assist crucial information about total lists of
unpaid customer invoices and credit memos. By the help of this, company can easily make
valuable analyse about total recovery time of their overdue payments (Lavia López and Hiebl,
2014).
Inventory management report: Such kind of reports is more useful for the operational
level department as they are working entirely over the capacity of stock. On the basis of total
position of inventory they can produce the desire output. The information about opening and
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closing details of stock which is being kept by “River Island Company” for their everyday
business activities.
Job cost report: This report is helpful for production department in order to examine total
cost which they are going to incur for the production of units of products. By the company can
manage and control their day to day costs and operations. It is more useful to make continuous
evaluation of their every day financial transaction in more specific and detailed manner. Through
this, “River Island Company” would be able to attain maximum benefits by utilising resources in
more effective ways.
Operational budgets: This report consists of all important information about their total
costs and expenditure they are investing in order to produce product and services. This can be
summarising by using sale, production and raw material budget during the course of action.
M1: Benefits of using various accounting system
All those accounting system which is explained above are have their own advantage and
limitation that make their separate from one another. The main advantage of using management
accounting system is to generate maximum profitability through using proper allocation of
resources. As well as to increase better understanding of their daily financial transaction for the
purpose of making vital decisions. This will lead to increase efficiency and internal growth for
the company.
D1: Critical evaluation of using management accounting reports
According to above discussed various report those are being prepare by manager by
collected vital information from various department. This will help the company as well as
inventors to make analyses of their financial condition so that future capital investment planning
can be done in more effective manner. Inventory management report can be managed through
using ABC costing and EOQ techniques. However, the other one are similarly responsible for
increasing the profitability of the company.
TASK 2
P3: Different types of costing method those are helpful in determining net profit for the company
It is crucial for every manufacturing business to make use effective costing methods to
evaluate net profit of an organisation. It is essential for the company to make use of
microeconomic techniques in their business operation to get more effective results. This is an
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effective aspect which will be helpful to evaluate well being from proper allocation of productive
factors as to make desirable and economic efficiency within an organisation. In accordance to get
better results with limited time frame the company require to make control of their extra costs
and expenses those are continuously increasing the cost of production. As cost is said to be value
of amount which is charged from getting something in return. This can increase extra burden
over the company as well as employees to give their best efforts in generating more profit during
an accounting period of time. It has been seen that without have proper control over the cost of
the company they cannot able to attain their desire aims and objectives. There are various types
of costs which are assorted with production of products and services. Some of them are discuss
underneath:
Cost volume profit (CVP): It is an effective tool which is used for measuring various
changes in costs and total volume which are affecting companies operating income and overall
net profit of the company (Bovens, Goodin and Schillemans, 2014).
Flexible budgeting: This happens to an adjusted or flexes aspects which modifies in more
effective manner and useful than a static budget. It can be changes in more easily because of
their flexible nature.
Cost variance: It is simply known as comparison among actual costs amount and its
budgeted value. This will helps them to analyse overall change they are getting during the
production process.
Absorption costing: This is one of the crucial costs which are applicable overall
production costs. It will consist of all variable and fixed costs so this is said to be full costing
techniques (Absorption costing, 2018). Most of the investors think that this costing is not so
effective tools which will be taken into consideration for taking future decisions.
Marginal costing: It refers as that costs which is charge with the production of one
additional unit during the period. As this cost consider only variable costs and ignore fixed cost
so this is said to be period costs. Henceforth, this is an effective method which will crucial for
taking future decisions.
Income statement on the basis of Marginal costing method:
Working 1: Calculate variable production cost £
Direct material cost 8
Direct labour cost 5
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Variable production O/h 2
Variable production cost 15
Working 2: Calculate value of inventory and production
Opening inventory Production Closing inventory
Nil 2000*15 = 30000 500*15 = 7500
Net profit using marginal costing ￡Amount £ Amount
Sales value
Less: Variable costs
Stock at the begining
Cost of production
Stock at the closing
Variable sales overheads
Contribution
Less: Fixed costs:
Fixed Production overheads
Fixed Selling overheads
NIL
30000
(7500)
15000
10000
52500
(22500)
(7875)
22125
(25000)
Net loss -2875
Income statement on the basis of Absorption costing method
Selling Price per unit ￡35
Unit costs
Direct materials cost ￡8
Direct Labour cost ￡5
Variable Production overhead ￡2
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Variable sales overhead ￡5.25
Budgeted production during the year is 3000
units
Production overhead: In this budgeted cost is £15,000and Actual cost is £10,000
Selling cost: under this budgeted cost is £10,000and Actual cost is £7875
Absorption costing working notes
Working Note 1: Calculate full production cost
Direct material ￡8
Direct labour ￡5
Variable cost ￡2
Fixed cost ￡5
Total ￡20
Working Note 2: calculate value of inventory and production
Opening inventory Production Closing inventory
0 2,000*20 = £40,000 500*20 = £10,000
Working Note 3: under/ over absorbed fixed production overhead
Actual fixed production: ￡15000
Fixed overhead: ￡10000
Total £5000 (under absorbed)
Net profit using absorption costings ￡Amount £Amount
Sales value
Less: Cost of Sales:
Opening stock NIL
52500
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Cost of production
Closing stock
(Under)/Over absorbed fixed prod. O/h
Gross Profit
Less: Selling Expenses
Variable sales expenditure
Fixed selling expenditure
40000
(10000)
7875
10000
(30000)
(5000)
17500
17875
Net loss -375
M2: Use of management accounting techniques
There are various types of accounting tools that assist an organisation to make use of
appropriate outcomes in limited duration. Product costing techniques costs of various types of
costs such as fixed and variable. These can help in analysing overall role of costing in setting
proper price of their products.
D2: Apply and interpretation information of business activities
In accordance with examine positive outcomes for the company manager of “River Island
Company” can need to make use of both absorption and marginal costing techniques. With this
costing, they are getting different results as net profit. The major part of difference are arises
because of treatment of fixed costs.
TASK 3
P4: Advantage and disadvantage of using planning tools use in budget
In every business, they need to make use of various planning tools to manage their
budgets. Some of them are discuss underneath:
Operational budget: This is one of the crucial budgets which is more effective for taking
crucial advantage of total income and expenses from the functional level. This would be
prepared by using sales, production and some other production related budgets.
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 Advantage: These will reduce extra expense and costs for the company by regular
recording of information (Nitzl, 2016).
 Disadvantage: It is too time consuming for the company because of their dynamic
nature.
Master budget: This happens to be summarised statement of all budgets. This can be
prepared at monthly, quarterly or yearly basis. This can be formulated by mostly large business
organisation.
 Advantage: The manager needs not to make use of separate budget because every detail
is mentioned in a single sheet of record.
 Disadvantage: These types of budgets are too costing to handle.
Process of budget
There are various types of budget process those are discuss underneath:
 In the initials stage, proper estimation of budget requirement can be determined.
 Based on company’s total estimation all incomes and expenses of various departments
are send to the upper level.
 After taking permission from higher department process of budget formulation get started
to implement.
 Then after the completion of budget, it is being sent again to top management to take
prior approval.
 At last, it is ready to present in front of others.
Pricing system
Some effective pricing system is mention below:
 Price skimming: It is an effective pricing method which assists in increasing total sales
of new products and services. In initial stage, prices are much higher.
 Economic pricing: In this method, an organisation used to set the price as low of their
various products in order to attract most of the customers.
Different costing system
There are various costing system which are helpful in determining future aims and
objectives. Some of them are:
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 Direct costing: These are one of the most effective costing methods which consist of
various changes in total capacities of outputs. It consists of direct material and labour and
other overhead expenses (Christ, 2014).
 Standard costing: These are essential for controlling cost and determining total
variances in order to compare standard outcomes with the actual one.
M3: Use and evaluation of planning tools
Planning is said to be an essential aspects for every business. Through this, future
estimation can be easily being attained in more easy ways. There are some useful tools such as
forecasting techniques which is use for estimation future costs and expense those are going to be
incur in near future. Some other tools are scenario and contingency tools.
D3: Critical evaluation to overcome financial problems
In accordance to increase profitability of an organisation, it is necessary to make analyse of
their financial problems those are going to affect their operations. In relation to deal with all
those of issues, a manager uses to apply certain techniques such as Key performance indicators,
benchmarking and financial governance.
TASK 4
P5 Use of management accounting to respond financial problem
“River Island Company” is a fashion brand organisation which produces special kind of
chargers for their customers. From the financial statements, it is observed that cited organisation
has the loss of £ 1.5 million. Due to this large number of issues are arising in organisation
regarding funds. Management accounting plays an important role to respond such issues and
improves their financial strengths by application of different approaches. The management of
organisation is decided to adopt balance scorecard approach to overcome from losses (Sisaye and
Birnberg, 2012).
Balance scorecard approach
It is important approach which is used by the management for improving their internal
functions and attainment of desired outcomes. It provides the opportunity regarding creation of
direct link between organisational functions and their objectives thorough effective control and
coordination. It includes four different perspectives which are defined below:
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 Financial: Ascertain the views about the organisational financial performance and the
different uses of such resources in organisation.
 Customer: Taking the views of customers and stakeholders about the performance of
organisation.
 Internal process: Gather the information about the internal process of organisation on
the basis of quality and efficiency of their products.
 Organisational capacity: Taking the views about organisational views through human
capital, infrastructure, technology, culture etc.
Just in Time: It is inventory strategy which is implemented by River Island to grab the
opportunities effectively and attain their targets within stipulated period of time. It provides the
opportunity regarding reduction of wastes in material through ordering in right quantity as per
the requirement(Moser, 2012).
M4: Analysis of various financial issues
It has been found that there are certain key financial problems those are related with
profit, productivity and product and services quality can affect their daily business operation
more badly. These problems can needs to be remove as soon as possible so that future aims and
objectives can be attain in more quick time (Zang, 2011).
CONCLUSION
From the above project report, it has been concluded that management accounting is an
essential aspects for every business organisation. This can assist in generating more effective
return in future time. For this purpose, various accounting and reporting system can help the
company to attain maximum profit in order to maintain their overall growth and performances.
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REFERENCES
Books and Journals:
Hilton, R. W. and Platt, D. E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Ward, K., 2012. Strategic management accounting. Routledge.
Wickramasinghe, D. and Alawattage, C., 2012. Management accounting change: approaches
and perspectives. Routledge.
Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of
Management Accounting Research. 27(1). pp.81-119.
Bovens, M., Goodin, R. E. and Schillemans, T. eds., 2014. The Oxford handbook public
accountability. Oxford University Press.
Nitzl, C., 2016. The use of partial least squares structural equation modelling (PLS-SEM) in
management accounting research: Directions for future theory development. Journal of
Accounting Literature. 37.pp.19-35.
Christ, K. L., 2014. Water management accounting and the wine supply chain: Empirical
evidence from Australia. The British Accounting Review. 46(4). pp.379-396.
Sisaye, S. and Birnberg, J. G. eds., 2012. An organizational learning approach to process
innovations: the extent and scope of diffusion and adoption in management accounting
systems. Emerald Group Publishing Limited.
Moser, D. V., 2012. Is accounting research stagnant?. Accounting Horizons. 26(4). pp.845-850.
Zang, A. Y., 2011. Evidence on the trade-off between real activities manipulation and accrual-
based earnings management. The Accounting Review. 87(2). pp.675-703.
Online
Absorption costing. 2018.[Online]. Available through:
<https://www.accountingtools.com/articles/what-is-absorption-costing.html>.
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