Management Accounting and its Essential Requirements

This report provides an overview of management accounting, its essential requirements, and different methods used for management accounting reporting. It also explores the integration of management accounting systems and reports. The report is categorized into different tasks, covering topics such as planning tools, cost analysis, and budgetary control.

Management
Accounting
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Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1 Explain management accounting and its essential requirements...........................................3
P2. Explain different methods used for management accounting reporting...............................6
TASK 2............................................................................................................................................7
P3 Calculate costs using appropriate techniques of cost analysis..............................................7
TASK 3..........................................................................................................................................12
P4 Planning tools used for budgetary control...........................................................................12
TASK 4..........................................................................................................................................14
P5 Management accounting system..........................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18
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INTRODUCTION
Management accounting is the provision of financial and non financial decision making
information for managers (Bobryshev and et.al., 2015). It is an accounting practice different
from financial accounting as it includes both monetary as well as non monetary factors into
consideration. Reports produced out of different management accounting systems provides
information whenever and wherever required. This information is used by management to
determine variances from the planned targets and to take necessary corrective steps.
This report has been made by consultancy firm AJ and sons in the context of their client Innocent
Drinks. The report is categorized into three parts. First part covers information about
management accounting systems and their integration within organisational processes. Second
part covers application of a range of management accounting techniques using given sets of data.
The last part covers the use of planning tools by management accounting to respond to financial
problems in organisation.
TASK 1
P1 Explain management accounting and its essential requirements
Management accounting is the practice of identifying, measuring, analysing, interpreting
and communicating financial information to managers for the pursuit of an organisation's goals.
It is also called managerial accounting (Carlsson-Wall, Kraus and Lind, 2015). It is aimed to use
internally by managers only to make well informed business decisions while financial accounting
is aimed at providing financial information to both internal and external stakeholders.
Basis for comparison Management Accounting Financial Accounting
Purpose and user It is used for internal decision
making purpose only by
management
It is used by both internal and
external stakeholders to take
their relevant decisions
Regulation It is not under regulation of
any law or statute.
It is governed by standard
laws, rules and regulations by
different authorities.
Audit It is not subjected to any kind
of audit or external
It is subjected to multiple
audits such as tax audits,
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investigation. corporate audit, etc.
Contents It includes both financial and
non-financial information.
It is only concerned with
financial information.
Management accounting is very beneficial and hence is being used widely now. Few benefits are
as follows:
 Planning and decision-making – In management accounting, financial information and
non financial information is presented at regular intervals (Charifzadeh and Taschner,
2017). This presentation includes forecasts, budgets and in-depth analysis. Hence, it
assists the management in planning the business activities and decision-making.
 Identifying early signs of problems – Management can identify early if a product is not
performing well, by comparing the accounts prepared and the actual performance of
product. This will aid in overcoming the constraints early on and avoiding future losses.
 Strategic management – Based on the information presented in management accounts, the
management can take decisions about continuing a product or modifying the sales
strategy. Since management accounts are not subjected to any law, management can
decide the areas that require more analysis, investigation and accordingly draw up
strategies.
Innocent Drinks can also adopt management accounting techniques to know if they
require any strategic changes to suit the current market situation such as changes in pricing,
location, marketing, etc. It can help them find shortcomings and plan better for the better future
of the company.
The study of management accounting are interlinked with each segment of business and
department of organisation. A few of the most common management accounting systems are as
below:
 Cost accounting system – It is an accounting system designed for manufacturers that
tracks the flow of inventory continually through the various stages of production.
Material flow cost accounting is a powerful tool when it comes to the identification of
resource inefficiencies in production systems (Sanjay Borad, 2020). This accounting
system is beneficial for companies to address those areas in which company's expenses
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are higher. The main purpose is to identify unwanted expenses and cut them so that
revenues can increase.
In Innocent Drinks, this accounting system can provide information about costs of different
activities company is undertaking. This can help managers determine whether or not they are
cost economical company. It will help them determine variances in different activities. They can
decide on cost cutting on high cost consuming activities or might feel need to pump more
resources in some activities which can earn them more profit by a little effort by the
management.
 Inventory management system – It is a discipline primarily about specifying the shape
and placement of stored goods. Information about raw material procured, finished goods,
remaining stock is recorded on regular basis (Chenhall and Moers, 2015). Various
approaches such as FIFO, LIFO, etc. to record inventories.
This can help managers of Innocent Drinks know the information related to their
inventory turnover, daily consumption of raw material, finished goods and the goods left in
stock. Since, the company deals in perishable products, it is essential to follow First in First
Out(FIFO) method so that wastage is minimised. Inventories should be ordered with Just-in-time
approach so that storage cost can be minimised and freshness of the product is guaranteed.
 Price optimisation system – Price optimization is the process of finding that pricing sweet
spot, or maximising price against the customers willingness to pay. It is based on price
determination as per the external environment factors such as competitor's prices, market
trends, demand of the product, etc.
Innocent Drinks can use this system to determine optimum prices it can charge on its
various products in accordance of customer feedback. It can also take decision on policies like
uniform pricing at all centres or multiple pricing policy. Company can also decide whether they
can charge premium prices at some fixed time at few centres or do they need to introduce under
pricing at some centres to increase customer attraction.
 Job costing system – Job accounting is the process of assigning the costs to incur to a
specific job the business is involved with. It aims to measure cost of each particular job
so that its profitability can be ensured (Chiarini and Vagnoni, 2015).
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This accounting system can help managers of Innocent Drinks ascertain cost of their each
product and whether it is running cost efficient or not. It will also help them knowing the
profitability of their each product in the market.
 Budgeting, trend analysis and forecasting – Budgets are extensively used as a
quantitative expression of the company's plans of operation (Collis and Hussey, 2017).
Managerial accountants utilize performance reports of deviations of actual results from
budgets. It also reviews trend-line for certain expenses and investigate unusual variances
or deviations.
The positive or negative deviations from a budget also referred to as budget-to-actual
variances will help management of Innocent Drinks to analyse what are the appropriate changes
needed to go forward. They may also include the use of historical pricing, sale volumes,
geographical locations and customer tendencies to make better strategies.
P2. Explain different methods used for management accounting reporting.
As much as it is important to determine factors affecting business prospects, it is
important to present them in formal written manner containing information regarding different
segments of a business. These reports are used by managers as per their need to take suitable
steps in administrative decision-making. Information about some reports is as follows: Budget report – It helps managers analyse their department's performance and control
cost. Budget is usually based on actual expenses and trends over years. Budget report of
Innocent Drinks can help the managers ascertain whether any specific department was
over/under budgeted, if they need to trim costs or would they be needed more funds in
future Inventory management report – This report generally include items such as inventory
quantity used, inventory waste, material needed or remained unused, hourly labour costs
or per unit overhead costs (Dekker, 2016). Managers at Innocent Drinks can prepare this
report to determine information about material turnover, juice/drinks manufactured and
stored, etc. Accounts receivable ageing report – This report is a critical tool for managing cash flow
related to the credits extended by company. This report include information related to
name of debtors, date of transaction, receivable amount, etc. Receivables that are due for
more than 30 days, 60 days and 90 days are separately recorded. With the help of this
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report, managers at Innocent Drinks can decide whether they need to tighten credit policy
or other changes which can help company receive its money sooner.
 Performance report – This report is created to review the performance of a company as a
whole as well as for each employee at the end of a term. This report contributes in
measuring financial performance of a company. Managers at Innocent Drinks can use this
report for detailed knowledge on profitability, return, loss, cash availability, etc.
Other managerial accounting reports include cost accounting reports,order information reports,
competitor's analysis, etc. which are also vital for businesses and are prepared as per the
requirement of the organisation.
Integration of management accounting system and reports
Managerial reports shows the result of the application of various management accounting
systems. Reporting is essential for management to devise corrective strategies needed to be taken
such as on doing inventories management, finance managers at Innocent Drinks find loopholes in
recording inventories (Kostyukova and et.al., 2018). They will report this in inventories
management report to senior management which will further take steps to either eliminate
shortcoming or will change strategy. Integration contributes to guide managers for better
decision-making for sustainable success of business.
TASK 2
P3 Calculate costs using appropriate techniques of cost analysis
Costing is a system for assigning costs to an element of a business. Costing may involve
only the assignment of variable cost, which are those costs that vary with some form of activity.
It may also include the assignment of fixed costs, which are those costs that stay the same,
irrespective of the level of activity.
Marginal costing - Marginal Costing is a costing technique wherein the marginal cost,
i.e. variable cost is charged to units of products while the fixed cost are considered as the cost of
the period (Lavia López and Hiebl, 2015).
Absorption costing - Absorption costing, is a managerial account method for capturing
all costs associated with manufacturing a particular product.
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Interpretation of data.
In the above part of report two income statements are produced which are interpreted
below in such manner:
From income statement prepared under marginal costing, this can be find out that there is
net profit for both months including April (£13000) and May (£22000). There is variation in net
profit because of higher sales in month of May. On the other hands, under absorption costing net
profit is of £19000 and £25000 for similar time period. The rationale behind difference in total
net profit under both techniques because of way of taking fixed and variable cost in process of
income statement preparation.
TASK 3
P4 Planning tools used for budgetary control
Budgetary control is process of measuring deviation of actual performance from the
budgeted one. In the process of this analysis, budgets are prepared for a specified future period
and at the end of this period, differences between actual and budgeted figures is calculated
(Maas, Schaltegger and Crutzen, 2016). This process of comparison refers to as monitoring
performance. This calculation of variance helps the management to take corrective actions (if
required) without any delay. These budgets relates to every function of organisation. In relation
with Innocent drinks limited, following planning tools can be used:
Capital budgeting- An organisation tends towards growth (growth in scale of production,
growth in sales, etc.), this objective can be accomplished by acquiring various major projects or
investments. Acquisition or construction of a new project or investment are examples which
require capital budgeting (Nørreklit, 2017). Purpose of capital budgeting is to help managers to
select one of the alternatives available with organisation, this selection is done with the help of
methods like, pay-back period, internal rate of return, net present value etc. In context of
Innocent drinks limited, tool of capital budgeting can help to evaluate different alternatives and
select one out of them.
 Advantages- Major benefits from this tool are protect company from future risk that can
create havoc if wrong alternative is selected and also evaluate and control various
expenses associated with an investment.
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 Disadvantages- Future is not well-known and it holds various uncertainties, therefore,
any assumption made in the process of capital budgeting can turn out to be false, and it
will shake up the whole process.
Cash budget
Cash budget is prediction statement of future cash inflows and outflows that will occur in
specific future period (Pelz, 2019). With the help of this budget, managers come to know about
cash surplus or deficit that can arise in upcoming period, and accordingly take required steps to
make situation according to need. For example in the case of Innocent drinks limited, managers
can use this technique to ensure proper allocation of cash for budgeted activities.
 Advantages- This budget helps managers to predict whether cash is enough to meet
future budgeted activities, and also that no over liquid cash is available that would,
otherwise, could be used for other productive activities. Disadvantages- Sometimes, cash budget may be confused with the profits, which can
result into deformation of cash budget. Rigidity associated with cash budget may restrict
free cash flows, and also uncertainty of external environmental factors can turn out to be
a huge factor for failure of budgets.
Static budget
Static budget, often termed as, fixed budget, refers to a budget of those expenses which
remain constant, irrespective of any change in sales volume and revenue,any change in scale of
production. This type of budget is most useful for those organisation which have a uniform
pattern of sales and expenses, and does not vary much over different period of time. For
example, in above company this budget can be used to prepare budget for fixed expenses like
rental expense, insurance etc.
 Advantages- Biggest advantage of static budget is it is easy to prepare, as it donot include
continuous changes or updations. This budget helps managers to evaluate their estimated
fixed expenses and revenues, if any overvaluation or undervaluation comes into
consideration, it can be corrected (Renz, 2016). Disadvantages- The rigidity of fixed budget can also create a problem as it lacks feature
of making any change, if in process of evaluation during specifies period, any needful
change is there, than also no alternation can be made. This will result into failure of
budgetary control.
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Planning tools used in budgetary control
These above explained planning tools can be used by managers to prepare required
budgets, as they present managers with predicted values of cash, sales or production and other
useful data. These budgets or information also works as base information for other type of
budgets. For example, given company can use these three type of tools to forecast financial
values like required cash, or to evaluate feasibility of any proposed project or investment.
TASK 4
P5 Management accounting system
Financial problem- There are several challenges faced by a business, due to one serious
issue and i.e. failure of management (Sugahara, Daidj and Ushio, 2017). When managers fails to
formulate effective budgets, policies they faces financial problem. To make one issue or
particular person responsible for financial problem is not right. Following are some of the
financial problems faced by two organisations, namely Innocent drinks limited and George's
drinks limited.
Decline in sales revenue- this is a type of financial issue in which company faces
continuous decline in its sales revenue over the years, this bin turn, results in reduced graph of
growth of business. This reduction can be because of increase in operational cost or higher
competition. This issue is faced by Innocent drinks limited and reason being ineffective pricing
pattern.
Unwanted higher expenses- This financial problem relates to hike in expenses, which
turns out to decline in profit margin. Reason can be failed budgeting, employees performance,
usage of obsolete technologies etc. This is a serious issue faced by Innocent drinks limited due to
excess of competition in the industry.
Accounting techniques
 Benchmarking- there are several organisations in an industry, all working in similar area
of business. Benchmarking refers to measuring performance of a particular organisation
with that of average performance of the industry. This technique helps to identify areas or
functions in need of attention or consideration by managers.
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 Key performance indicators- this is a measuring technique used to evaluate financial and
non financial aspects that effect an organisation. Financial aspects refers to data about
profits, revenues, debts, etc. non financial aspects refers to macro- environmental factors
like political factors, technological factors, brand awareness and company profile, etc.
this technique helps in addressing cause of financial issues faced by an organisation.
 Financial governance- It is basically a technique of regulating, controlling, monitoring
and managing financial transactions of an organisation. In this way, any financial issue
can be resolved. This is a method of maintaining record of financial data of a business in
a systematic order.
Comparison:
Base for
comparison
Innocent drinks limited George’s drinks limited
Financial issue Major issue faced by this company
is of decline in sales revenue, which
in turn, resulted in, decreased
growth graph of company.
George's drinks limited has a sudden
increase in operational cost, which
had a negative impact on sales
revenue and hence decline profit
margin.
Technique to
recognize issue
With the help of benchmarking,
managers identified the area of
cause of decrease in sales. And
hence, took corrective steps.
Key indicator approach was used to
assess cause of financial issue, and,
then, cause was eradicated that had a
impact on operational cost of
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Illustration 1: benchmarking, 2020

company.
MAS Prize optimization technique-
according to this technique prices
are set according to satisfaction that
customer derive from that product.
This is done through analyzing
responses given by customers. This
in turn, results into increased trust
and feeling of participation by
customers. In this way, issue of
decreased sales gets solved.
Cost accounting system- in this
technique, efforts are made to
identify those points which incur
more expense than that projected in
budgets. This is done by categorizing
every activity into different levels,
and than comparing between actual
cost and estimated cost..
Management accounting system to solve financial problems
MA helps managers to formulate required strategies and policies to overcome financial
problems faced by an organisation (Tucker and Schaltegger, 2016). Techniques like marginal
costing, BEP, helps managers to look into considerable factors affecting decision making
process. For example: in above comparison chart, it is visible that price optimization and cost
accounting system has been used be managers to solve financial issue faced by them. There are
several other systems also like- inventory management system, job costing system.
Planning tools to solve financial problems:
Basic purpose of budgetary control is to provide vital information like estimated income
and expenses to managers, so that, they can use this information to solve financial issues. As in
relation of above company, tools like capital budgeting, cash budget and formulation of other
budgets can assist it to overcome financial problems. Planning tools of budgetary control
enhances co-ordination, planning and control in an organisation, because of these benefits,
financial problems can easily be solved.
CONCLUSION
On the basis of prepared report, it is concluded that management accounting system and
techniques play a vital role in solving financial problems. This report clearly shows that
integration of accounting techniques and system with the process makes a necessary step of
success of business. Mid section of this report shows as how a financial technique is used to gain
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financial report. Last part of this report focuses on how a manager can cross financial obstacle
with the help of MAS. Without implementation of managerial accounting, survival of a business
is very tough, as there will be several problems which can only be solved using tools and
techniques of managerial accounting.
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REFERENCES
Books and Journals
Bobryshev, A.N. and et.al., 2015. The concept of management accounting in crisis conditions,
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Carlsson-Wall, M., Kraus, K. and Lind, J., 2015. Strategic management accounting in close inter-
organisational relationships, Accounting and Business Research. 45(1). pp.27-54.
Charifzadeh, M. and Taschner, A., 2017. Management accounting and control: tools and
concepts in a Central European context. John Wiley & Sons.
Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp. 1-13.
Chiarini, A. and Vagnoni, E., 2015. World-class manufacturing by Fiat. Comparison with Toyota
production system from a strategic management, management accounting, operations
management and performance measurement dimension, International Journal of
Production Research. 53(2). pp. 590-606.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan International
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Dekker, H.C., 2016. On the boundaries between intrafirm and interfirm management accounting
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Kostyukova, E.I. and et.al., 2018. Improvement cost management system for management
accounting, Research Journal of Pharmaceutical, Biological and Chemical Sciences.
9(2). pp. 775-779.
Lavia López, O. and Hiebl, M.R., 2015. Management accounting in small and medium-sized
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Management Accounting Research, 27(1). pp. 81-119.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
management accounting, control, and reporting, Journal of Cleaner Production. 136. pp.
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Nørreklit, H. ed., 2017. A philosophy of management accounting: A pragmatic constructivist
approach. Taylor & Francis.
Pelz, M., 2019. Can management accounting Be helpful for young and small companies?
Systematic review of a paradox, International Journal of Management Reviews. 21(2).
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Renz, D.O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
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Benchmarking. 2020. [Online]. Available through:
<https://asq.org/quality-resources/benchmarking>
Cost Accounting Systems – Meaning, Importance And More. 2020. [Online]. Available
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