Management Accounting

Running Text: Management Accounting
Management
Accounting

Management Accounting
Contents
INTRODUCTION...................................................................................................... 2
1. Management Accounting and its Applications.................................................2
2. Roles and Principles of Management Accounting............................................3
3. Types of Management Accounting System and Its Application in Organisation
3
A. Job Costing System...................................................................................... 3
B. Price Optimising System.............................................................................. 4
C. Cost Accounting System...............................................................................4
D. Inventory Management System...................................................................5
4. Management Accounting Reporting................................................................5
5. Application of Management Accounting Techniques: Galway PLC...................6
6. Planning Tools used in Budgetary Control.....................................................14
7. Management Accounting: A Solution to the Financial Problems....................18
8. Management Accounting can lead the Organisation to Sustainable Success in
Response to Financial Problems: An Analysis......................................................20
9. Conclusion..................................................................................................... 21
References........................................................................................................... 22
1

Management Accounting
INTRODUCTION
This report discusses about the management accounting and its methods used
primarily by the organisations as a tool of planning and measurement for
evaluating their performances. To integrate the business activities effectively
with management accounting systems, sound management accounting systems
are required. So, this report would provide clarity over the management
accounting systems too. Additionally, the preparation of income statements
under marginal costing and absorption costing is also being carried out. There
are many tools for planning which are used for the budgetary control and these
also assist in making and forecasting budgets. Further, a comparison is done to
address the users of the report that how management accounting can aid in
resolving financial problems. At the end, we would know how the management
forms strategies and plans by employing management accounting techniques for
making the implementation and execution easy.
1. Management Accounting and its Applications
Management accounting is the process of interpreting, analysing, identifying and
presenting those accounting facts that have been procured with the help of cost
accounting and financial accounting (Drury, 2015). Business managers make use
of management accounting for the policy formulation, decision making and carry
out the day to day business operations.
Management accounting is applicable in the following ways:
1. Performance Measurement- With the help of management accounting,
managers evaluates performance of the employees as well as their
efficiency level. Under this, the actual performance is measured with
standard performance set by the company. In case of any deviation,
necessary steps are taken to eradicate it.
2. Evaluation of Risks- Management accounting aids in the identification of
risk factors arising in the organisation after which, with the help of
effective management proper steps are taken to remove or minimise the
identified risk.
2

Management Accounting
3. Resource Allocation- With the help of management accounting,
organisations are able to allocate the resources in an efficient manner to
different departments which results in its optimum utilisation of those
resources.
4. Presentation of Financial Statement- The data like cost data as well as
financial data can be obtained through Management accounting. When
these data are entered in the final financial statements it makes it even
more useful for the readers and further it supports in the managerial
process like decision-making.
2. Roles and Principles of Management Accounting
There are many roles and principles of Management accounting. Some of them
are as follows:
1. Influence- Management accounting emphasises more on an effective
communication as it benefits in making significant decisions after
considering all the other factors. An effective communication is one
which consists of all the important information required for correct
decision making.
2. Relevancy- Management accounting aids the management of the
organisation in making important decisions. Therefore, it should consist
of such information which are high on quality as well as are relevant
and could assist in taking quality decisions.
3. Focuses on Generating Value- Management accounting focus more on
the generation of values instead of simply analysing the data.
Generation of values means focusing more on the factors like costs,
risks and opportunities relating to value generation.
3

Management Accounting
3. Types of Management Accounting System and Its Application in
Organisation
There are many kinds of management accounting systems whose requirements
are discussed as follows:
A. Job Costing System
It refers to a system where manufacturing cost are assigned to each of the
distinct product. At the same time, expenses are also monitored and
proper records are kept. The company producing the identical products
can employ this system for tracking their order expenses. The system
works in the following manner:
a) Enquiry is Received- The quality, price and time taken for the order
completion are the factors which actually matter to the consumers.
b) Estimation of Job’s Price- The price of the job is estimated by the
accounted after considering the factors like tastes and preferences
of the customers.
c) Receiving order- The order gets confirmed once the customer is
satisfied with the price associated with the offered product.
d) Order for Production- Production process starts after order for
production is placed with the production department.
e) Cost Recording-Each cost arising during the process of production is
recorded.
f) Job Completion- Once the production is done, a final completion
report is forwarded to the accounts department of the organisation.
Then accounts department decides on the final costing for the job
after making proper comparison with the budgeted or estimated
cost.
B. Price Optimising System
To control the prices of the resources price optimising system is used. The
prices of the multiple products at a time can be decided by the companies
with the help of price optimising system. This system also aids in
understanding how demand fluctuation takes place at the different levels
of prices. The factors like product life cycle, competitors pricing strategies
4

Management Accounting
etc. are taken into account by the price optimisation system before
deciding the final prices of the product within the organisation. Sometimes
the prices are optimised to satisfy the business strategy. No doubt, that
the management accounting system is placed to increase the price of the
product as much as the same product’s demand is maximised. However,
the management sometimes need to set the prices to affect or change the
competitors’ market positioning.
C. Cost Accounting System
Cost Accounting system assist companies in computing product
production cost. A cost accounting system is considered good and
effective only if it meets the following two essentials:
a. Total support and cooperation of different departments are required in
the formation of an effective cost accounting system. It would facilitate
in correct decision relating to ascertainment of product price.
b. The cost accounting system should be such that it adapts itself as per
the needs of users and the company. The system should not be
complex and rather it should be easy to understand and execute.
D. Inventory Management System
This system helps in managing and supervising the non-capitalized assets
plus stocks of the organisation. Integration with such system could help
the companies to maintain an effective and efficient inventory flow inside
the company and also at the sales point.
4. Management Accounting Reporting
Management Accounting Reports are prepared for assisting the management of
the organisation in doing proper forecasts and making sound decisions. There
are various reports which are prepared in an organisation which contains the
important statistical data as well as financial data. These data plays a key role in
making quality decisions for the growth and profitability of an organisation.
1. Budgeting Reports- Budgets are an important part of managerial
accounting which are prepared on the basis of past figures and
accordingly projections are made. Companies try to meet their expenses
5

Management Accounting
as per the budget and these budgets help the managers in reducing
unnecessary costs.
2. Job Cost Report- This report is prepared after considering the costs
associated with raw material, overhead, labour etc. This facilitates the
managers to compare between the cost of product and the selling price of
the product which ultimately assist in increasing the profit margin.
3. Performance Report- The actual revenues and expenditures are
compared with the budgeted revenues and expenditures. The difference
arising in the actual and budgeted and other such related information are
recorded in the performance report. This report would be analysed and
then required changes would be made at the time of making new budgets.
This would help the managers in planning the demand for future.
Other reports like, Order Information Report- Order Information Reports
makes the comparison between the orders placed and orders received and also
defines the backlog information (Edmonds and Olds, 2013).
Table A: Integration of Management Accounting Systems and Management
Accounting Reporting with Company X
Let us assume the name of the company given in the case as "Company X"
Type of Reporting Integration with Organisational Process
Budgeting Reports
If the organisational process of the Company X
would be integrated with the budgeting
reports, it would facilitate the company's
activities to be carried out in a more target
and objective oriented manner.
Job Cost Report
The process of company X should be carried
out in a way to reduce or minimise cost. These
Job cost reports would further help the
Company X in understanding and formulating
proper pricing strategies and minimising the
cost of production.
Performance Reports
When the activities of Company X would be
integrated with the performance report, it
would help the company to formulate its
strategies for future regarding productions,
6

Management Accounting
cost of production etc.
Other reports like, Order
Information Report
When the activities of Company X would be
integrated with the Order report, it would help
the company to supervise the sales order and
analysis of the information obtained from the
sales order report.
5. Application of Management Accounting Techniques: Galway PLC
Problem 1:
Galway Plc. manufactures and sells a single product .The following budgeted/
actual information is provided in relation to the production of this product: All
costs are in GBP. Show all workings very clearly.
Selling price per unit 50
Direct materials per unit 8
Direct labour per unit 5
Variable production overheads per unit 3
Details for the months of May and June 2018 are as follows:
May June
Production of Product A 500 380
Sales of Product A (units) 300 500
Fixed production overheads are budgeted at £4,000 per month and are absorbed
on a unit basis. The normal level of production is budgeted at 400 units per
month.
Other costs
Fixed selling
£4,000 per
month
Fixed Administration
£2,000 per
month
Variable sales commission 5% of sales
7