Management Accounting: Importance, Systems, and Methods

This document provides an overview of management accounting, including its importance and various systems used. It also explains different methods used for reporting and explores planning tools in management accounting.

Management accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
L01...................................................................................................................................................1
P1. Explaining MA and importance of its systems.....................................................................1
P2. Explaining various methods that are been used for reporting...............................................4
M1. Evaluating the merits and an application of the MA systems.............................................5
LO2..................................................................................................................................................6
LO3..................................................................................................................................................8
Planning tools and their use in management accounting............................................................8
LO4................................................................................................................................................10
Comparing and contrasting the ways in which the company can resolve its financial problems
by using MA systems................................................................................................................10
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
MA means framing and providing timely information in terms of statistical and financial
values to the business managers so that it could make for routine and the short term decisions
towards operational activities. The report is of KEF Ltd which is a medium sized organization
operates its business in the manufacturing segment. Furthermore, the study involves deeper
insights towards various systems of MA and its significance in the running the business
smoothly. Moreover, the report highlights the net profits occurred by applying marginal and
absorption costing tools. It also includes different planning tools and MA systems that are used
by the company for achieving its goals and overcoming the finance related problems in an
efficient way.
L01
P1. Explaining MA and importance of its systems
Management accounting refers to integral part of the management that is concerned with
determining, presenting, summarizing and reporting an information to the external and internal
users. It means such information that is been used for framing the strategy, controlling, decision
making and planning for optimum utilisation of the resources.
MA comprises of an internal systems that KEF Ltd utilise in measuring and evaluating its
internal processes for managing the activities of the company (Thomas, 2016). There are various
MA systems that helps in maintaining optimum inventory level, effective cost control and
performance measurement.
Integration of MA systems is crucial for KEF Ltd because it allows it in conducting an
integrated assessments and the audits with optimization of the resources and the procedures. It
also enables the company in reducing the time that is been taken for running certain activities,
eliminating an amount of the time interrupted and thus reducing the cost accordingly.
Origin of management accounting
It has firstly emerged as an important activity at the time of revolution of the early
industrial in leading enterprise and industry. It has been seen that MA is been introduced after
the financial accounting that could trace their origins towards its stewardship role within the
European trading merchant venture that begins in Italian Renaissance and also towards the tax
records which the government requires (McLaren, Appleyard and Mitchell, 2016). The two
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main industry that played a significant role in early history of the the management accounting
were the railroads and the textiles.
Role of MA
MA plays a critical role in enabling the managers for leading KEF Ltd in effective and
efficient way in relation to managing all the functions of an enterprise. MA provides for a short-
term planning and helps in assessing the data on the previous performance that could be
specifically useful as the model for the future performance (Aduda and Ndaita, 2017). It
performs for the series of the tasks that ensures the company in maintaining financial security,
handling all the financial matters and hence helping in driving overall strategy and management
of KEF Ltd.
Principles of MA
Compiling & Designing- This principle states that MA systems is been designed in such
a manner that presents for a relevant data. Furthermore, accounting information could be
modified and is adopted in meeting the needs of the management.
Management by an Exception- It is the principle that is been followed at the time of
presenting an information to the management. It reflects that the system of budgetary control and
the standard costing tools are been followed in MA systems.
Control at accounting source- As per this principle cost should be best controlled at a
point which are been incurred at the accounting source (Trigo, Belfo and Estébanez, 2016).
Qualitative and quantitative information is been prepared for exercising effective control by
evaluating performance of an individual workers, use of the services and details regarding the
material issues like power, machine, maintenance, repairs and vehicles.
Accounting for the inflation- In accordance to this principle, profits cannot be earned
until and unless the capital is been maintained in respect to real terms. It is important for
analysing value of the capital contributed by owners of concerns in context of real value of the
money through the revaluation accounting. In such a way, inflation can be taken into an account
for judging the real success of KEF Ltd.
Utility- The MA systems and the related forms must be used as long as it serves for a
useful purpose.
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Integration- It states that all needed information of management is been integrated so
that it can be used effectively to best potential and at the same time, an accounting service is
been provided at the minimum cost.
Forward looking- MA systems should be framed in such a way that future problems
through the application of standard costing tools by way of fixing the standards (Nguyen, 2018).
In such a way, future problems might be prevented for occurring in the future.
Difference between financial and management accounting
Financial accounting Management accounting
It classifies, records, analyses and interprets
financial affairs of an enterprise.
It helps the management in making an effective
decisions about the business.
It is applied to reflect an accuracy and the fair
picture of the financial affairs (Rikhardsson,
2017).
It is applied by the managers in taking
meaningful strategies and the steps.
It takes into account only those information
that are quantitative in nature and could be
expressed in monetary terms.
It considers both qualitative and the
quantitative information within the study.
It is legally compulsory or mandatory for the
company in preparing the final accounts for all
the companies.
It does not have any statutory requirement in
preparing the management report for KEF Ltd.
Different MA systems are as follows-
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Cost accounting system- It is the system that is used by KEF Ltd in recording the
production activities by following the perpetual inventory management system. It is an
accounting system that is designed for the manufacturers which helps in tracking flow of an
inventory constantly through several production stages (Nespeca, and Chiucchi, 2018). This
system plays a crucial role in the organization for analysing the profitability of an individual
service, job and the products adequately. It provides for an assessment of the cost behaviour
patterns in the firm that in turn helps in estimating future cost with reasonable accuracy.
Job costing system- It is the system of accumulating and recording the cost where there
exist an identifiable activity towards which the cost might be collected. With application of this
system, manager could keep a track on the cost incurred in respect of each job, maintaining the
data that is often relevant towards the business operations.
Inventory management system- It refers to the set of the policies and the procedures
which monitors inventory level and identifies to which level it is to be maintained at the time
when the stock needs to be replenished (Quattrone, 2016). It is found as the most important
system for an entity as it helps in managing the stock items and inventory. This system analyses
the need of an inventory and automates and ordering process at the workplace.
Price optimization system- This MA system is seen as the mathematical analysis that is
been made by an enterprise for determining the ways in which customers will be responding to
various prices for their services and the products through the different channels. It is essential
because it enables KEF Ltd in determining the most suitable prices which meets the business
objectives like profit maximization.
P2. Explaining various methods that are been used for reporting
There are different report that are been framed by the managers of KEF Ltd which
facilitates an analysis of the estimated cost and income for the future periods. These are are as
follows-
Budget report- This report is perhaps considered as the most important and fundamental
report in the MA. It is the report that helps the managers in understanding and controlling the
costs within an enterprise or different departments. By making evaluation of an expenses in the
previous periods, it creates possibility in estimating the budgets for the coming years and in
finding the places for cutting down the costs.
4

Accounts receivable report- It refers to the report that is crucial for any of the
businesses which offers the credit to its customers. It facilitates an overview of the credit details
in accordance to the age typically includes the separate categories for the items that are seen as
30, 60, 90 days. This could help in adjusting the credit policies in order to align it with the
payment capabilities of the customers.
Job cost report- It means the report that provides for a review of total cost that is
accrued in the single project as compared to expected revenue that is yielded by the particular
project (Management accounting reports, 2018). It is the report that enables the leaders in
evaluating profitability of the particular job and in optimizing their operations by emphasizing on
jobs which are typically counted as most profitable.
Inventory report- KEF Ltd produces the physical products specially in manufacturing
with the low fault and founded this report as most valuable. It helps in centralizing the data
regarding cost of an inventory and the other types of the overhead included in the process of
production by providing the raw data in optimizing an assembly or the machining.
Performance report- This report is created for reviewing performance of an overall
entity for each of the employee at period end. Managers make use of these performance reports
in making an important strategic decisions relating to future of the company. Performance
reports plays a vital role for the firm in making accurate measure of its strategies for reaching to
the mission effectively and efficiently.
M1. Evaluating the merits and an application of the MA systems
MA Systems Benefits and applications
Inventory management software This system helps in integration of an entire
business with minimising the inventory cost
and maximising the profits and the revenue. It
also helps in achieving an effectiveness and
efficiency within the operations.
Price optimization system It is a system that provides for an immediate
financial related benefits and provides an
opportunities for focusing on the several goals
like sales margin, no. of conversation etc.
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Job costing Job costing system enables in assessing
performance of the employees and provides an
accurate measure & access to disbursements
that are incurred in each job.
Cost accounting It helps in identifying the profitable and the
non-profitable activities with providing a
guidance for the future production procedures
and policies.
LO2.
Absorption costing – It refers to the method that is used for accumulating the cost
attached with the production process and appointing them towards an individual products. This
kind of costing is needed by accounting standards for creating the valuation of an inventory
which is stated in the balance sheet of an entity.
Marginal costing- It means the tool where an additional cost that is the variable cost is
directly charged to the units of the cost whereas fixed cost for a particular period is been entirely
written off against contribution.
Particulars Cost per unit
Absorption costing Marginal costing
Direct material 15 15
Direct labour 25 25
Variable production
overhead 10 10
Fixed production
overhead 130000/20000 6.5
Total cost 56.5 50
Income statement as per absorption costing
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Particulars No. of units £/unit £ £
Sales 18000 70 1260000
cost of opening
inventory 56.5 0
add: production 19000 56.5 1073500
1073500
less: closing
inventory 1000 56.5 56500 1017000
Gross profit 243000
less: under
absorption -13000
Net profit 256000
Income statement as per marginal costing
Particulars No. of units £/unit £ £
Sales 18000 70 1260000
cost of opening
inventory 0 50 0
add: production 19000 50 950000
950000
less: closing
inventory 1000 50 50000 900000
Contribution 360000
less: fixed
production cost 130000
Profit 230000
Working note:
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Fixed absorbed
overheads @ 18000
units 18000*6.5 117000
Fixed production
overhead 130000
Under absorbed -13000
Interpretation- From the above evaluation it has been assessed that Net profit ascertained
from employing the absorption costing method equates to 256000 for the month of June.
However, the net profit accounted through the application of marginal costing attained as
230000. This shows that absorption costing technique shows a better picture of the profitability
as compared to marginal costing because it takes into account both fixed and variable cost and
deducts it from the product cost. On the other hand, marginal costing does not considers both the
cost and only accounts for variable cost which does not indicates accurate profits.
LO3.
Planning tools and their use in management accounting
There are a variety of planning tools that are used in management accounting and budgetary
control is one such tool. Budgetary control helps in formulation of different budgets so that they
can be used to document the actual performance with the estimated one and draw relevant
conclusions (Miller, Hildreth and Rabin, 2018). There are different kinds of budgets that can be
prepared and each has its own set of advantages ad disadvantages:
Sales Budget: Sales budget is mainly used in order to guide a business regarding the sales
activities i.e. how much sales a company needs to achieves, what is the ratio of gods and services
that need to be produced etc.
Advantages Disadvantages
 It helps the businesses in determining
the overall objectivity so as to ensure
that they plan in right manner.
 Sales budget helps in formulating a
particular criteria that helps the
managers of the company in
 The accuracy of these kinds of budgets
is marginally poor since they are
changing on regular basis and therefore
it is difficult to formulate a common
base for comparison.
 The preparation of this budget is a long
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determining what are the targets that
they need to achieve and thus manage
each perspective accordingly.
and time consuming process where
management has to take into
consideration each and every aspect.
Zero Budgets: These budgets are prepared form the starting i.e. the company does not carry
forward any of the previous year transactions and therefore, every year the budget is prepared
freshly having new figures and data (Kaye, Frances and III, 2016). This helps in incorporating
changing and dynamic factors of the environment in which business operates.
Advantages Disadvantages
 The application of this kind of budget
helps in improving communication at
the work place and thus helps in
examining the view point of each
department that is operating in the
business.
 It helps in incorporating all the latest
changes that the business might face
and therefore is more dynamic and
realistic that other kind of budgets.
 When there are large numbers of
employees in a company, this kind of
budget is not an effective technique to
implement since chance of fraud might
increase in that case.
 This is long process and since it is to be
prepared repeatedly each year, the
mangers are not able to utilise their
time on other more important tasks.
Continuous Budget: Continuous or rolling budget refers to that kind of budget which will keep
on adding on the previous budgets after their stipulated time gets over. It can be monthly or
yearly and helps in increasing the accuracy of the budgets.
Advantages Disadvantages
 The major advantages is that it reduces
the number of errors by incorporating
amendments in the current budgets and
then preparing budget for the next
month thus reducing chances of any
errors that might creep in (Gallani and
et.al., 2019).
 Since it incorporates each and every
entry and has to be made after
rectifying the errors of the previous
budget, it becomes a time consuming
process and therefore it is difficult to
prepare.
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 It helps in determining the future
aspects of the business and link them
well to the current practices of a
business.
LO4.
Comparing and contrasting the ways in which the company can resolve its financial problems by
using MA systems
Benchmarking- This technique shows an analysis of the performance of one company
with its competitors. It gives a clear picture regrading the areas where an improvement is
required and the ways for increasing the profits. It helps in knowing the amount that is to be
spend on the advertising, training and rental cost in comparison to the competitors (Chenhall, and
Moers, 2015). This in turn enables in resolving the financial problems in relation to over
spending and huge cost and also helps the company in attaining competitive edge.
KPI- It refers to the measurable value which demonstrates an effective way in which the
company could achieve its major objectives. This technique helps the firm in reaching the targets
regarding sales, profits and production effectively. KPI act as the most useful tool in overcoming
the financial problem relating to delay in the deliver, meeting demand of the customers etc.
Balanced scorecard- It is the strategic management performance measure that is used in
determining and improving the several internal functions of the business and resulting outcomes.
This tool is used for measuring and providing the feedback to the company (Thomas, 2016).
This technique helps in resolving financial issues such as low profit margins and lower market
share as it provides a broad view of the crucial perspectives of business that includes customer,
internal process, financial and growth outcome.
Variance analysis- This MA tool involves analysing the difference that is resulted
between two figures that is actual and budgeted. It is the technique that is been applied to
operational and financial data which aims in identifying causes of the variance (Cleary, 2015). It
helps in maintaining an effective control over the expenses of the project by monitoring the
planned against an actual cost. Effective analysis of variance could helps the company in
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spotting the trend, opportunities, issues and threats in terms of financials to achieve long and
short term success.
Financial governance- It referred as the ways in which the company gathers, manages,
analyses and controls the financial information. It includes in the way in which an entity traces
the financial transaction, controls the data, manages performance, operations, disclosures and
compliance. In other words, it means the procedures that is used by the firm for managing its
business data. This technique prevents the financial problem by facilitating internal controls
through proper audit practices along with the data security and validation (Quattrone, 2016). This
tool also useful in monitoring the strategies and the principles that are important in presenting a
true and fair view of final reports.
KEF Ltd. ABC Ltd.
The organization adopts financial governance
and benchmarking in order to achieve
competitive position against its rivalry
(Nguyen, 2018). It helps in maintaining the
financial information in an effective manner.
This company uses key performance indicator
and balanced scorecard in order to overcome
the financial problems. These techniques helps
the company in making optimum use of the
resources and developing efficiency in the
manufacturing process so that higher
profitability could be achieved and customers
demands could be met on time.
Characteristics of effective management accountant
Information under management accounting must comply with several number of the
features that includes objectivity, verifiability, comparability and understandability which helps
in controlling, planning and making suitable decisions for KEF Ltd. Such skills helps in
improving efficiency in achievement of objectives with appropriate forecasting related to future
business activities (Aduda and Ndaita, 2017). Through these skills company could be able to
cope up with the uncertainties and lack of funds in the long run.
Effective strategies and the systems
Development of the systems such as inventory management software, cost accounting,
job costing and the price optimisation that helps in timely reporting, disclosing the financial
positions and is responsibly governed and owned within the business.
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CONCLUSION
By summing up the above report it has been reviewed that MA systems plays an essential
role in managing all the activities of the business and also in attaining growing success in the
future periods. The planning tools helps in re-examining or re-evaluating entire allocations and
the expenses within each department for an accounting period so that cost could be controlled
and larger profits can be earned. MA systems provides a framework in creating efficiency and in
knowing the gap that is present between actual and the budgeted values so that corrective actions
could be taken.
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REFERENCES
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Cleary, P., 2015. An empirical investigation of the impact of management accounting on
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systems: A case study investigation of EVA™. The British Accounting Review. 48(3).
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Open (pp. 283-297). Springer, Cham.
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making. Journal of Asian Business and Economic Studies. 25(1). pp.33-49.
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Rikhardsson, P. M., 2017. Information systems for corporate environmental management
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Thomas, T. F., 2016. Motivating revisions of management accounting systems: An examination
of organizational goals and accounting feedback. Accounting, Organizations and
Society. 53. pp.1-16.
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Trigo, A., Belfo, F. and Estébanez, R. P., 2016. Accounting Information Systems: evolving
towards a business process oriented accounting. Procedia Computer Science. 100. pp.987-
994.
Gallani, S., and et.al., 2019. Budgeting, Psychological Contracts, and Budgetary Misreporting.
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Kaye III, F.J., Frances J. Kaye and III, 2016. Automatic budgeting system. U.S. Patent 9,495,703.
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