Importance of Management Accounting Techniques

This assignment discusses the significance of management accounting techniques, including cost reduction methods such as absorption costing, marginal costing, and variance analysis. It highlights the importance of budgeting techniques, like modern budgeting, and inventory management. The report concludes that employing these techniques can help Murano restaurant units manage costs effectively and respond to financial problems in a timely manner.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................1
P1 Explaining MA systems along with their essential requirements.....................................1
P2 Presenting managerial reports that are related to MA......................................................4
P3 Presenting different types of costing system for determining cost and profit margin......5
P4 Assessing planning tools that are related with management accounting system..............9
P5 Explaining management accounting system that can be undertaken for responding
financial problems................................................................................................................12
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................15

INTRODUCTION
Management accounting (MA) is highly associated with the preparation and analysis
of internal business reports. Tools & technique of MA assists in evaluating cost and
operations of business unit. By using MA tools manager of the business unit can assess the
area of cost control and would become able to take action for improvement. Further, field of
MA also assists business organization in developing competent framework for the upcoming
time period. For this project, Murano restaurant unit has been selected which offers dinning
services to the customers at affordable prices. In this, report will shed light on the essentials
or need of MA in the context of concerned restaurant unit. Further, it also entails the manner
in which absorption and marginal costing method helps in ascertaining cost as well as
margin. Along with this, it also develops understanding about the planning tools that helps in
developing competent financial framework. Report will also describe the way in which MA
tools help in mitigating monetary issues.
P1 Explaining MA systems along with their essential requirements
Management accounting: Filed of MA is highly concerned with the recording and
analysis of business activities related to the internal aspects or business activities. MA tools
and report helps in enhancing efficiency, productivity and profitability to a great extent.
Hence, by employing the tools and techniques of MA Murano can ensure effective
management of operations.
Significance or need of management accounting
 MA provides high level of assistance to the restaurant unit in doing appropriate
forecast about future and aid in significant decision making
 By undertaking MA, owner or concerned authority of Murano can make appropriate
forecast regarding cash flows (Management accounting and its importance, 2017).
 It also helps in understanding variances and makes contribution in the attainment of
goals by suggesting suitable improvement measure.
 Murano can analyze suitable rate of return through using the techniques of
management accounting.
Different types of management accounting system that can be undertaken by Murano
are as follows:

Cost accounting: Such system or technique of MA assists in making decision about
the cost pertaining to products, services, projects etc. Hence, by using such accounting
system owner of Murano can assess unit cost and thereby able to sets suitable price.
Moreover, cost accounting lays high level of emphasis on capturing or recording cost of
production, fixed expenses, depreciation on capital equipment etc (What is cost accounting?,
2017). Along with this, cost accounting also enables management team of Murano to measure
financial performance by making comparison of actual output with the standards. Hence, the
main goal of management accounting system is to enhance the level of cost efficiency and
capability by advising appropriate course of action to the management team.
Thus, it can be said that cost accounting system aid in effective decision making by
recording, classifying, analyzing, summarizing and evaluating alternative ways to control
expenses. Hence, in the context of Murano, requirement of such accounting tool is highly
significant. Moreover, it considers cost plus method for the determination of pricing. Thus,
for setting price business unit is required to calculate or have information regarding per unit
cost.
Advantages Disadvantages
 Helps in finding areas of wastage
losses and inefficiencies
 Facilitates cost reduction and
maximizes profit margin
 Advising decision in relation to make
or buy
 Assists in setting prices of the
products or services offered
 Under cost accounting, past
information’s are available whereas
management is concerned about
future
 For the installation of cost accounting
system firm has to make several
expenses because it demands for the
high maintenance of records.
 Rigid in nature so it does not meet all
the objectives
Job costing: It involves or lay emphasis on the accumulation of costs pertaining to
material, labour and overheads which are related to specific job. By using such tool of MA,
owner of Murano can trace or monitor the cost of job prominently (Job costing, 2017).
Continuous monitoring enables firm to assess whether cost can be reduced in the later jobs or
not.

Advantages Disadvantages
 It assists in determining profitability
which is associated with each specific
job
 Offers detailed analysis of cost and
helps in making appropriate
assessment or evaluation
 Job costing demands for clerical
work so it is considered as highly
expensive
 Highly developed production control
system is required for operating job
costing system more efficiently
Inventory management: According to MA, there are several techniques which
provide high level of assistance in managing inventory such as economic order time (EOQ).
Just in time (JIT) etc. Ordering and holding are the main two costs which are highly
associated with stock. In this regard, by maintaining stock of food as per demand and
standard or economic order manager of Murano can exert control on cost and enhance
margin. Along with this, there are some other methods of LIFO, FIFO and average that
provides assistance in managing record pertaining to inventory (Fullerton, Kennedy and
Widener, 2014). Thus, through undertaking the system of inventory management Murano can
ensure effectual use of funds by removing the level of wastage.
Advantages Disadvantages
 Less wastage
 Cost control
 High margin
 Time consuming process
 Needs skilled personnel for dealing
with inventory management software
Price optimization: This tool of MA enable firm to analyze the manner in which
customers will respond at different price levels. In the present era, such evaluation becomes
important because after the recessionary period consciousness among the customers are
increased significantly pertaining to price level. Moreover, after the recessionary period
disposable income of the people is severely affected. Along with this, company’s main
motive is to attain high margin by offering services to the customers. In this regard, by
employing the system of price optimization owner of Murano can suitable price that meet the
organizational goal pertaining to operating profit margin.
Advantages Disadvantages
 Helps in indulging balance between  For doing mathematical analysis or

customer’s expectation and
organizational goal
 Assists in enhancing customer base
evaluation firm needs talented
personnel. In the absence of having
same restaurant unit will not become
able to take benefit from such model.
P2 Presenting managerial reports that are related to MA
Managerial reports imply for the framework which gives information about day to day
functioning of restaurant unit. It provides manager with timely and accurate information
about the internal operations. MA reports are highly significant which in turn helps in
streamlining operations by indicating the need for better decision making. Benefits which are
associated with managerial reporting are as follows:
 Helps in evaluating performance of each department
 Gives input for setting appropriate bonus and incentive plans for the employees
 Assists in identifying the efficiency level of personnel and helps in conducting
training session on time.
 Enables manager to make optimum use of funds by taking corrective measure on time
when deviations are identified
Types of managerial report
 Budget or performance report: Preparation of such report is highly significant in the
context of Murano. Moreover, this managerial report contains information about the
deviations take places in actual and standard aspect. Along with this, such report also
presents the reasons due to which specific target in relation to sales and expenses are
not met (Chenhall and Moers, 2015). Thus, by taking into account performance report
owner of Murano can take timely action for improvement. Further, considering the
level of deviation business organization can allocate suitable monetary fund to each
business activity.
 Cost report: This report furnishes information about the cost incurred while
performing different activities and functions. By using this report, owner of the
restaurant unit can assess the expenses related to offering services to each customer. It
helps company in taking suitable pricing decision and generating enough margins.
Further, cost report also helps in assessing redundant activities and reduces the level
of expenses to a great extent. By using such report, manager of Murano can compare

cost and becomes able to take strategic measure or action for improvement.
Considering all such aspects it can be stated that cost report assists in comparing
expenses and helps in offering products or services at less price. Thus, input which are
offered by such report helps in formulating suitable policies and gaining comparative
edge over others.
 Inventory report: Stock management report is highly significant in the context of
Murano restaurant unit. Such unit contains information about the cost level and
wastage. Thus, from such report manager of the firm can identify the level to which
inventory is used, sold and replaced more frequently. In addition to this, such report
also helps in making comparison between wastage level and gives indication
regarding the need of taking action. Moreover, high level of wastage places direct
impact on cost level and affects organizational profit margin.
 Accounts receivable or ageing report: Debtors report can be prepared by Murano for
assessing the time period within which they are making payment. From assessment, it
has identified that debtors time period has significant influence on the level of
working capital. Thus, by using such report business unit can assess whether they
need to make modifications in the existing policies or framework or not (Otley and
Emmanuel, 2013). Thus, by taking suitable measure on time restaurant can improve
its working capital position and becomes able to carry out day to day activities in the
best possible way.
Hence, by taking into account all the above depicted aspects it can be presented that
managerial reports accelerate decision making aspect. It offers opportunity to the restaurant
unit to achieve success or meet goals by taking appropriate action on time.
P3 Presenting different types of costing system for determining cost and profit margin
Absorption costing: It implies for the too which lays emphasis on treating all the costs
as product irrespective of the aspect that they are variable or fixed. Under this, cost of
production includes material, labour, fixed and variable overheads. Moreover, such costing
method assumes that all the incurred cost can be recovered through the means of selling
price. Hence, such full costing method provides high level of assistance in ascertaining
appropriate cost and margin. It is highly aligned with the matching and accrual concept of
accounting (Absorption Costing: Definition, Formula & Example, 2017). Moreover, such
accounting concepts demand for matching cost with the revenue pertaining to particular
period. Further, it presents the better view of cost and margin by avoiding the separation of

cost in terms of fixed and variable. However, on the critical note, it can be stated that
absorption costing method creates difficulty in making comparison and control of cost.
Marginal costing: It helps in ascertaining the increase or decrease which takes place
in total cost of production when one additional unit is produced. It classifies cost in terms of
fixed and variable. Under marginal costing method, profitability is measured through the
means of PV ratio. Further, in this, variances which take place in the opening and closing
stock does not place high level of impact on per unit cost of output (Marginal Cost:
Definition, Equation & Formula, 2017). MC method highlights per unit contribution and
presents the extent to which it is related to each product.
Particulars
Cost per unit according to
absorption costing method (in £)
Cost per unit according to
Marginal costing (per unit (in £)
Material cost 6 6
Labour cost 5 5
Production overheads
Non-fixed
expenses 2 2
Fixed (2100 /
700) 3
Cost per unit
(production) 16 13
Assessment of GP and NP (absorption costing method)
Particulars
Amount (in
£)
Total sales revenue (600 * 35) 21000
Total manufacturing cost (refer working note 1) 11,200
Add: stock in the starting of period 0
Less: Ending inventory (100 * 16) 1600
9600
Over-absorbed fixed overheads (Refer working note 1) 100
Costs of goods sold (COGS) 9500

Gross profit (GP) (2100 – 9500) 11500
Less: Other overheads
Administration expenditure 700
Selling expenditure 600
Variable sales overheads 600
Total overheads 1900
Net profit (NP) (11500 - 1900) 9600
Working note 1:
Total production cost
Material (700 * 6) 4200
Labour (700 * 5) 3500
Variable production overheads (700 * 2) 1400
Fixed production overheads (700 * 3) 2100
Total 11200
Income statement (Marginal costing method)
Particulars
Amount (in
£)
Total sales revenue (600 * 35) 21000
Total production cost (consider W.N. 2) 9,100
Costs of goods sold (COGS) (consider W.N. 3) 7,800
Add: variable sales overheads 600
Total variable cost 8,400
Contribution 12,600
Less: Other overheads
Administration expenses 800
Selling and distribution expenditure 600
Fixed production cost 2000
Total overhead cost 3400
NP (12600 – 3400) 9,200

Working note 3:
Total production cost
Material cost (700 * 6) 4,200
Labour cost (700 * 5) 3,500
Variable production overheads (700 units @ 2 PU) 1,400
Total production cost (4200 + 3500 + 1400) 9100
Working note 4;
Particulars Figures (in £)
Total production cost 9100
Add: Inventory at the beginning of the year 0
Less: Stock at the end of year (100 * 13) 1300
COGS 7800
Reconciliation statement as per marginal and absorption costing is enumerated below:
Particulars Amount (in £)
NP in accordance with AC method 9,600
Less: Fixed production overhead on closing stock (100 * 3) 300
Less: Over-Absorbed overheads 100
Net profit in accordance with MC 9,200
Interpretation: By doing costing analysis it has assessed that cost of production per
unit on the basis of absorption and marginal costing accounts for £16 & £13 respectively. The
main reasons behind decreasing per unit cost of production, under marginal costing, is that it
does not consider fixed expenses related to manufacturing or offering services. Further, from
evaluation, it has assessed that due to the treatment of fixed expenses contribution is higher
such as £12600 respectively in comparison to GP determined through marginal costing
method. On the other side, NP margin of Murano is £9600 as per absorption costing method
which is higher over the marginal technique. Thus, by keeping all such aspects in mind it can

be depicted that Murano should determine cost and margin by referring the technique of
absorption over others.
P4 Assessing planning tools that are related with management accounting system
Effective planning is the key of organizational growth and has high level of impact on
profitability aspect. On the basis of such aspect, in the absence of having suitable and
competent financial plan Murano might face difficulty in making optimum use of financial
resources. In this regard, there are several methods that Murano restaurant can employ for the
purpose of planning are as follows:
Zero base budgeting: It is recognized as a modern tool of budgeting which helps in
developing realistic monetary framework. Under ZBB, manager starts with zero base which
shows that it completely ignores the past year frameworks. Budget based on this method is
highly realistic in nature because in this every expense in clearly justified. As per this
technique, manager of restaurant unit needs to make focus on assessing each alternative way
of performing activities and thereby includes the cost of same in the plan (Fullerton, Kennedy
and Widener, 2013). Thus, while preparing budget as per ZBB restaurant unit needs to keep
in mind following benefits and drawbacks:
Advantages:
 ZBB assists in removing all the redundant activities by presenting the cost effectual
ways of doing activities.
 It facilitates efficient allocation of financial resources by laying emphasis on avoiding
historical numbers.
 Zero base budgets leads or enhances employee motivation by involving them in the
decision making aspect.
 By relooking every item of cash flow manager prepares budget under ZBB and
thereby helps in presenting accurate view of financial aspects.
Disadvantages:
 For preparing budget as per ZBB, manager of restaurant unit has to organize training
because without the same it is difficult to explain or justify every line of item.
 ZBB is recognized as time consuming process because it demands for in-depth
evaluation.

 Further, for preparing budget according to ZBB, involvement of large number of
employees is required. Thus, if a different department of business unit does not have
enough personnel then it might difficulty to prepare budget according to ZBB.
Activity based budgeting: By undertaking ABB technique owner of Murano can ensure
greater transparency in the budget process. On the basis of such modern tool, cost incurred
pertaining to each functional area is recorded. Hence, considering the respective cost driver
emphasis is laid on determining relationship between cost and activity (Messner, 2016).
Thus, by employing such tool business entity of Murano can formulate suitable budget.
Advantages:
 ABB facilitates cost reduction by offering meaningful information
 It leads proper pricing policy by ensuring optimal allocation of cost to various
products
 Gives indication in relation to eliminating unproductive activities and thereby ensures
better performance
 Further, ABB provides accurate cost information and helps management team in
employing suitable productivity improvement approaches like TQM, business process
re-engineering etc.
Disadvantages:
 Highly time intensive process
 Such technique is not suitable for the small sized business units
 Along with this, such tool is not suitable for the companies which offer one or few
products
Investment appraisal tools: It includes wide range of tools such as net present value,
payback period, average and internal rate of return that business unit can be undertaken for
evaluating the viability of capital project. Attainment of high profit margin over the
investment is one of the main objectives of business organization. In this regard, by
evaluating cost and benefit of proposal over the foreseeable life manager of the restaurant
unit can assess the level of return (Ax and Greve, 2017). Tool of investment appraisal such as
payback method assists firm in identifying time period within which it will recover initial
investment. Further, ARR method helps in identifying mean return that is associated with the

investment proposal or project. On the other side, NPV method presents return or amount
which will be attained by the firm over initial investment.
Usually, manager faces difficulty in making selection of one project out of the several
alternatives available. In this, by using the techniques of investment appraisal business entity
of Murano can assess the project which proves to be more profitable for the business
organization.
Advantages and disadvantages associated with such tool are as follows:
Advantages Disadvantages
Payback
method
 Easy to calculate and
understanding
 Helps in identifying the
period after which business
unit become able to
generate margin
Ignore fact that time has significant
impact on monetary value while
determining results.
Net present
value
 Offers accurate results by
considering the time value
of money concept
 It assists in identifying
return through considering
cash flows rather than profit
Under NPV, analyst has to make
estimation about cost of capital which
is highly difficult.
Internal rate of
return
It expresses return in the form of
percentage considering time value of
money concept and aid in effective
decision making.
 It does not help in making
comparison of projects
which are mutually
exclusive.
 Further, in this, analyst has
to determine two cost of
capital or PV factors which
is highly difficult task.
Creation of responsibility centre’s: In the present time, for the attainment of goals
and objectives firm needs to create responsibility centres such as sales, profit and expenses.
Managers of all such responsibility centres are accountable to develop suitable strategies that

help in getting the desired outcome. In this, if managers fail to attain aim then they have to
justify each and every aspect or reason associated with the same (Dekker, 2016). Thus, in
this, input which is provided by the manager of each responsibility centre helps in developing
competent plan or framework for the near future.
Advantages:
 Encourage manager and personnel of each department make best efforts for the goal
attainment.
 Facilitates delegation of roles and responsibility
Disadvantages:
 Sometimes, high goals which are setting down by the business unit negatively affects
employee motivation
 Justification pertaining to failure in relation to the goal attainment is subjective in
nature
P5 Explaining management accounting system that can be undertaken for responding
financial problems
By undertaking below mentioned MA tools business entity of Murano can meet financial
issues or discrepancies in an effectual way:
 Variance analysis: It implies for the quantitative investigation that is highly associate
with determining or analyzing difference which takes place between actual and
planned behaviour. Such technique is highly significant in the context of Murano
restaurant unit. Moreover, on the basis of such technique, by making evaluation actual
income and expenses in against to standard aspects manager of Murano can determine
deviations. Thus, assessing the reasons due to which deviation occur business entity
would become able to make optimum use of resources through taking strategic
measures on time (Otley, 2016).
For instance: Actual and standard sales revenue of Murano implies for £10000 & 11000
respectively. Thus, through comparison, it has assessed that adverse variance of 1000
occurred. In this, by doping evaluation, it has found that due to the lack of awareness among
the customers Murano failed to generate desired sales revenue. Hence, by doing promotional

activities restaurant unit can provide information to the customer about its exclusive dinning
services and would become able to attain high margin. Considering all the above aspects, it
can be stated that variance analysis technique helps in responding monetary problems in the
best possible way.
 Budgetary control: Such system of MA is associated with making evaluation of
actual income and expenses with the planned results. By employing such technique
manager of Murano can assess that whether plan is followed within the firm or not.
Along with this, budgetary control tool enables restaurant to make changes in existing
framework for making profit by giving clear indication. Technique of budgetary
control gives input to the manager and helps in developing competent plan for the
near future.
 Financial governance: It refers to the process on the basis of which operations are
managed in accordance with the predetermined rules and regulations. In other words,
it refers to the reporting capabilities of business organization which in turn covers
wide range of aspects from internal control to audit, process workflows, data security
and integrity (Quattrone, 2016). Thus, by making evaluation of all the reports within
the suitable time frame owner of Murano can assess the area where improvement
measures needs to be undertaken. Thus, by making evaluation of operations
considering specific process restaurant unit becomes able to attain success through
taking strategic measure.
 Key performance indicators: By setting KPI’s in relation to both financial and non-
financial aspects owner of Murano can avoid financial problems to a great extent. On
the basis of such tool by setting key indicators regarding sales revenue and profit
margin business entity can persuade personnel and direct their efforts in the right way
(Fullerton, Kennedy and Widener, 2014). In this, through making comparison of
current performance of personnel in against to the predetermined KPI’s owner of
Murano can identify deficiencies. In this way, such MA tool provides assistance in
taking appropriate decision about the near future. Hence, measuring performance in
against to the key performance indicators firm would become able to resolve issues
within the less or appropriate time frame.

CONCLUSION
From the above report, it has been concluded that for cost reduction and maximization
of profit margin it is highly essential to employ the techniques of management accounting.
Besides this, it can be inferred from the report that by using MA techniques Murano can
manage inventory and become able to set optimal prices. It can be summarized that by
preparing reports like cost, inventory and budget report manager of Murano can monitor
business performance more effectually. Along with this, it has been articulated that restaurant
unit should employ absorption costing which helps in assessing suitable cost and margin.
Further, it can be stated that owner of Murano should give priority to modern budgeting
techniques over the traditional one while preparing financial plan. It can be seen in the report
that techniques of variance analysis and budgetary control helps in responding monetary
problems in the best possible way.

REFERENCES
Books and Journals
Ax, C. and Greve, J., 2017. Adoption of management accounting innovations: Organizational
culture compatibility and perceived outcomes. Management Accounting Research, 34,
pp.59-74.
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.
Dekker, H. C., 2016. On the boundaries between intrafirm and interfirm management
accounting research. Management Accounting Research. 31. pp.86-99.
Fullerton, R. R., Kennedy, F. A. and Widener, S. K., 2013. Management accounting and
control practices in a lean manufacturing environment. Accounting, Organizations and
Society. 38(1). pp.50-71.
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.
Messner, M., 2016. Does industry matter? How industry context shapes management
accounting practice. Management Accounting Research. 31. pp.103-111.
Otley, D. and Emmanuel, K. M. C., 2013. Readings in accounting for management control.
Springer.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–
2014. Management accounting research. 31. pp.45-62.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31. pp.118-122.
Online
Absorption Costing: Definition, Formula & Example. 2017. [Online]. Available through:
<https://study.com/academy/lesson/absorption-costing-definition-formula-example.html>