Importance of Management Accounting System and Reports

This document provides an in-depth understanding of the importance of various management accounting systems and reports in organizations. It discusses the techniques of cost analysis and their benefits, such as marginal costing, absorption costing, and break-even analysis. The document also highlights the integration of management accounting systems and reports in organizational processes.

Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK1.............................................................................................................................................1
P1. Importance of various management accounting system..................................................1
P2. Importance of management accounting report and its type.............................................3
M1 Evaluation of Benefits of various management accounting systems..............................4
D1 Integration of management accounting system and its reports in organisational process.1
TASK2.............................................................................................................................................1
P3. Appropriate techniques of cost analysis..........................................................................1
M2 A range of management accounting techniques..............................................................4
D2 Interpret data for a range of business activities................................................................4
TASK3.............................................................................................................................................4
P4 Advantages and disadvantages of planning tools used in budgetary control....................4
M3 Use of planning tool to prepare budget............................................................................6
TASK4.............................................................................................................................................7
P5 Financial problem and techniques to solve these problem................................................7
D3 Planning tools for solving financial issues.......................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Management accounting is the practices of collecting useful information related to
business activity and recording of that data in accounting report that help manager to make
effective decision (Management accounting, 2018). Management of companies collect,
reminder, measure, control and examine the collected information that aid them to make policies
and strategies to succeed goal. It is a system which is followed by the management to resolve
various financial issues that may arise with the organisation. To realize the value of direction
accounting Airdri is chosen, it is hand dryer manufacture founded in 1974 and one of the small
enterprises of UK.
In this project report detailed information about management accounting their system and
importance of report is shown. Project focus on different costing method, various planning tool
which are useful in maintaining budgets and important of management accounting approaches to
resolve different financial problem faces by companies.
TASK1
P1. Importance of various management accounting system.
Accounting is a method of recording, maintaining, auditing and analysing important
financial information to the management and advise them on taxation matter. It is useful in
revealing the profit and loss for an accounting year and provides the values and nature of
organisation owner equity, assets and liabilities. Accounting is further divided in two categories
that are financial accounting and management accounting.
Management accounting is defines as the process of identifying, analysing, recording,
and presenting useful financial information which is used by internal manager for making
decision, improving performance, planning for future and controlling operation with an
organisation. This helps them to forecast various future events with the help of past experiences
and develop short and long term effective policies (Amidu, Effah and Abor, 2011).
Financial accounting refers to the tracking of firm's money transaction using centralised
standard to measure the economic performance for an accounting year. It is summarising and
presenting of transaction in financial report or financial statements such as cash flow or income
statements and balance sheet. In Airdri manager used three important accounting system to
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evaluate and analyse information like cost, performance and inventory. These are explained
below:
Cost accounting system: This system is help small and large company to examine and
improve its real profitability by estimating actual cost of its product. Cost accounting system
helps manager to measure the total cost that is incurred during the production of a particular
product. Airdri produces expensive hand dryer thus it require huge cost in the production so this
system is useful in this company. They use to record all the production related operation and help
them to get exact information cost which is involved in production process. There are mainly
three type of costing system. Actual costing is used to track and record direct costs that are
involved in producing a product (Carlsson-Wall, Kraus and Lind, 2015). For example in Airdri
manager uses to measure the cost of total hour utilised in manufacturing a product. Standard
costing is the analyses of difference between actual and budgeted cost like manager of Airdri
prepare a budgets of cost that is going to be involved in production process and then they
compare it with actual cost involved. Normal costing is used to derive the cost of a product. For
example in Airdri manager uses normal costing to derive the cost of hand dryer.
Inventory management system: This system is used by production organisation to
ascertain the actual information of stock lying with them. Manager track the inventory while it is
in transit, storehouse or in production process. Inventory lies within organisation in three basic
form which is raw material, goods in progress and finished good. In Airdri manager uses this
system to record the total inventory present in there production departments. They also manage
and record the total flow of raw material and finished hand dryer with this system. There are
various techniques of inventory management system to maintain effective report of their stock
such as perpetual and periodic inventory, FIFO, LIFO and JIT. Management of Airdri use FIFO
techniques in which earlier received stock will be used first for production of product (Dražić
Lutilsky and Dragija, 2012).
Job costing system: This system is mainly associated with evaluating and analysing cost
of individual job that is involved in different operation performed within the company. For
example in Airdri manager uses this system to analyse direct and indirect cost that is involved in
the production of hand dryer. So they can further reduce the cost if required and improve the
efficiency of business to increase the profitability of Airdri.
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P2. Importance of management accounting report and its type.
Accounting report are very important that shows the exact picture about the company
performance. It is the systematic recording of every financial transaction to the report by
manager. Later these report are presented to shareholders both internal and external to show the
financial position about the company. These report are maintained at end of every quarter so that
management have the holistic view about the company finance. Management accounting reports
are crucial for small business firm like Airdri, as they derive important strategies to reduce cost
and maximise profit. Manager of Airdri prepare different type of report to ease decision making.
Some of the basic report are described below:
Budget Report: It is most fundamental report of management accounting as it help the
business owner to understand and control across with an organisation. They calculate the cost in
prior year and estimate budgets for the following year and determine the places to reduce cost. In
Airdri, manager prepare cost budgeted report to control expenditure involved in production of
product. They also estimate the future expenses and form strategies with the help of this report.
Importance: This report aid to predict the financial health and give the picture about the
overall operation of company. Management calculate the expense and monitor the revenue
generated during an accounting with the help of budgets report (Granlund, 2011).
Inventory management report: This report is prepared to record detail information
about the inventory laying in an organisation. It aid to make the supply chain more efficient, data
on inventory stock, labour and other expenses involved in production process. Management of
Airdri prepare these report to compare different distribution channels within company to provide
best manner of supply their product. They also maintain record of total stock available, goods in
transit and finished product.
Importance: This report have major importance in management accounting as manager
keep a track record of stock present within the company. Inventory management report aid them
to record all quantity of product in warehouses and maintain proper flow of the product.
Account receivable report: These report are crucial for every organisation that provide
good and services on credit to their buyers. It helps to determine the exact outstanding amount
form debtor and prepare depending on the days of outstanding. Manager of Airdri prepare these
report to evaluate the total amount which is need to be recovered form their client. It keeps the
systematic record of those buyers who have not paid full amount at the time of purchase.
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Importance: This report is also important of manager as they determine total amount of
revenue to be generated in future and help to improve credit policy. With the help of account
receivable report management modify the collection process of Airdri.
Operating report: This report is tools that are used to reiterate the status of a project or
operation. Management distribute these report to experience employee for setting goal and
appraise performance of other worker working in any operation activity. In Airdri manager uses
these report to record the daily functioning of different operation related to production of Hand
dryer. This helps the, top manager to increase the profitability of operation and increase
efficiency of worker. Maintaining a daily operational performance report helps them to inform
other employee about the business condition so they make better decision.
Importance: Major importance of this report is to provide detail information about the
operation of business. So that management of organisation can make a effective decision in
respect if operation are not profitable (Johnson, 2013).
M1 Evaluation of Benefits of various management accounting systems.
System Benefits
Cost accounting system  This system helps managers so that they can analyse
most profitable products for company.
 It helps managers to ascertain faithful prices for
products by furnish the accurate data of cost.
Inventory management system  Managers with the help of this system increase
efficiency and profitability of company by maintaining
stock.
 It increases level of transparent information of
inventory.
Job costing system  Managers ascertain the profitability of individual job
performed within an organisation.
 It provides detailed information of cost like labour and
overheads which is involved in different jobs of
company.
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D1 Integration of management accounting system and its reports in organisational process.
Management accounting system and various report are very important for every
organisation to grow as these system and report help to record and measure performance of
company. This provide detail information to control cost, amount owned by debtors and financial
position of company etc. Budget report are useful in estimating total cost, account receivable
reports can help the managers to improve the credit policies and collection process. Inventory
management report is useful to track the stock available in warehouse and inventory in whole
supply business. Whereas, operational report are useful to keep record of daily business activity
performed within an organisation. These all report help them to increase the efficiency of
company and improve performance of business (JOSHI and et. al, 2011).
TASK2
P3. Appropriate techniques of cost analysis.
Cost is that amount which is paid to get something it is usually the movement of money from
buyer to seller. In business, it is the monetary value which is going to be sold by seller that includes
cost of direct material, overheads, labour etc. All expenses are cost, but all cost are not considered as
expenses because some are incurred in the acquisition of income generating assets. Manager of
company have to be able to determine the costs of product or services they offer for sale so that they
can generate more profit. Every organisation wants to earn huge profit so they fir appropriate price
for their product keeping actual cost in mind. Faithful cost of product will attract more number of
customers. There are many types of cost such as direct cost and indirect cost that should be managed
by manager of business to generate more revenue.
Managers in Airdri should fix such cost or selling prices for the hand dryer that may attract
more customers and aid to acquire more market share. Cost of products includes different direct and
indirect expenses. Following techniques are followed by managers of chosen company to calculate
their net profits:
Marginal costing: This is the total cost involved in production on one additional unit of
output. The main purpose of analysing marginal cost is to ascertain the best point for an organisation
so it can achieve maximum profit. Marginal costing is a code whereby variable cost are charged to
cost units and the fixed cost aspects to the applicable period is carved off in full against the input for
that period. So in common bit is known as variable costing also in which only variable cost are

accumulated and cost accumulated and cost per units is determined depending upon variable cost
(Klychova, Faskhutdinova and Sadrieva, 2014).
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Absorption costing: It is consider one of the best ways to determine cost of product and
net profit and known as full of total costing method. A method of costing that includes all fixed
and variable costs are apportioned to cost centres where they are accounted for using absorption
rates. The main focus of this system is to make sure that all cost incurred in production of
product must be recovered from selling price of those goods and services. It includes the
following components such as prime cost, indirect overheads, selling and distribution costs.
Break even analysis: It is a useful tool that assist companies to determine a point where
a new product and services will be beneficial or profitable. In Airdri, manager use this tool to
ascertain the number of hand dryer they need to sell to at least cover their total costs. It is a point
company neither lose money nor make money but cover all their costs.
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A. Total number of product sold
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
BEP in units 500
b. Calculation of break even point in accordance to sales revenue
Sales per unit 40
Variable costs VC = DM + DL 28
Contribution 12
Fixed costs 6000
Profit volume ratio PVR = Contribution / sales * 100 30.00%
BEP in sales 20000
c. Calculation for getting desire profit of 10,000
Profit 10000
Fixed costs 6000
Contribution 16000
Contribution per unit 12
Sales 1333.33
Margin of safety: it is used in break-even analysis to indicate the total amount of sales
that are above the break even points. In general marginal of safety specifies the aggregate by
which company sales could decline the company will become non-profit.
M2 A range of management accounting techniques
Management accounting techniques are useful in calculation net profit and increase the
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efficiency of organisation. In Airdri, manager uses different costing method to calculated net
profit for current accounting year like marginal absorption costing. Management also follows
two types of tool marginal tool and historical tool.
D2 Interpret data for a range of business activities
From the above calculation of marginal and absorption costing it is observed that
management of airdri tries to make best result from these methods. As a result, net profit
generated from marginal costing is $17500 and net margin of Profit Company earned by
using absorption costing techniques is $15675. So it is clear marginal costing is more
benefited for Airdri to calculate net profit. Break-even point of company is determined by
selling 500 units and sales ate $6000. In respect if company wants a desired profit of
$10000 than total units they have to sell is 1333.33.
TASK3
P4 Advantages and disadvantages of planning tools used in budgetary control
Budget: It is an estimation of incomes and expenditures for a specific period of time. A
budget is prepared by the managers of a company with the help of previous year data and current
market trends. It is formulated to perform organisational activities and presented to the internal
stakeholders (Mistry, Sharma and Low, 2014).
Cash budget: It is known as an estimation of money inflows and outflows for a business
over a particular timeframe. This specific spending budget is utilized to assess, regardless of
whether Oak Cash and Carry Ltd has adequate money to work their business in not so distant
future time. It is classes into two section, for example,
Cash receipts: It is essentially said to be a measure of cash hold by an organization
available to be purchased of goods and services. Accountant of Oak Cash and Carry Ltd can add
money receipts to be adjust brought down to give organization additional sum of trade current
cast at present organization.
Cash payment: It is a type of journal record i.e. used to record transaction that is paid in
form of money. A cash payment comprises of paying a bank or commission charge or pull back
money. In the activity that any of payment made in real money is recorded into money book.
Advantage: It fits well with the prerequisite for consistence and costs control. Costs are
arranged through association and protest of consumption.
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Disadvantage: It can't neglect issues of government points, their association with
spending plan and administrations to be conveyed by government.
Master budget: It is known as the mixture of spending plans of lower level created by
organization's administrators occupied with planning process and incorporates planned financial
statements, financing plan and cash flows likewise. This financial plan is introduced might be
Fifty-fifty yearly or quarterly or might be yearly. A narrative clarification as note might be
appended with ace spending which clarifies arranging and key course of organization.
As master budget is fundamental arranging instrument utilized by administration group to
perform and coordinate the exercises of association and in addition utilized for execution
examination of financial department of the company (Moser, 2012).
Income statement: It is the money related record which represents organization's
financial performance over specified bookkeeping period. It additionally proves received
incomes and costs through both operating and non-operating activities. However, it represents
the end net profit or losses that are taken about by a management during the period of time.
Income statements are also commonly known as Profit and Loss statements.
Balance sheet: It is additionally one of most critical last financial statements of
organization which provides the entire position of organization. The accounting report
additionally discloses organization’s aggregate resources and liabilities that is mentioned under
the income statement of the company, or helps in determining the financial position of the
company. There are two parts of balance sheet one is assets part which proves the estimates of
total current assets and total non-current assets. Second part indicates data about liabilities and
additionally included into to investors value.
Benefits: This type of spending helps in getting ready for future occasions as this
financial plan consolidates all parts of future. It has spending plans of the considerable number of
offices because of administration can without much of a stretch recognize what office causing
issues in organization.
Limitation: Along with merits, there are couple of constraints are additionally present
which expresses that this kind of spending plan is hard to refresh and there is absence of
specificity (Ruiz-de-Arbulo-Lopez, Fortuny-Santos and Cuatrecasas-Arbós, 2013
).
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M3 Use of planning tool to prepare budget
Sept Oct Nov Dec Jan
Receipts £ £ £ £ £
Cash sales 250 350 255 380 450
Credit sale receipts from
debtors 320 150 100 120 220
Other income received 415 430 320 215 330
Total receipts (a) 985 930 675 715 1000
Payments
Purchases 215 260 290 330 415
Wages- Labour and
overheads 115 90 180 210 150
Fixed costs 200 200 200 200 200
Capital expenditure - Plant 650
Advertising 20 35 55 75 90
Total Payments (b) 1200 585 725 815 855
Surplus/Deficit (a) – (b) -215 345 -50 -100 145
TASK4
P5 Financial problem and techniques to solve these problem.
Financial problems: Businesses of any organisation have no shortage of financial issues.
Depending on industry size, size of business scale, financial footing, numerous other factors any
one of hundreds of financial challenges may present themselves. However, a few general
categories are common to all businesses (Schaltegger and Csutora, 2012). No matter, whether
the business is starting, operating or growing. Some of the basis financial problem faced by
Airdri is described below:
Problem of cash flow: Sometimes a business doing well on paper, building up its account
receivables can find shortage of cash inflow getting such customer to pay likely in a manner that
keeps a regular inflow of cash, but it’s not easy to collect receipts from all debtors on time. To
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avoid these challenges, maintain good collection methods, set up the payment criteria in written
contracts and screen customers before extending credit or payment.
Lack of money management: In Airdri, manger lacks the skill to manage their funds and
they face the problem of shortage of fund. They do not have proper knowledge to control their
expenses.
More spending than earning: In Airdri, manager spends more revenue on sales promotion
activities to increase their sales. But as a result company is not able to generate income and there
is a chance of new financial problem. Their promotion activities are not able to attract more
customer there low sales for the period (Ward, 2012).
To resolve these financial problem companies follows various management accounting
approaches such as benchmarking and KPI.
Benchmarking: In business world, companies uses benchmarking as appoint of references
as they form reports as a way to compare themselves to the other companies within the same
industry. This is the practice of a business firm comparing key metrics of their operation to the
other similar organisation. In Airdri management uses this approaches to make report that are
followed by other manufacture companies within the same industry. The prepare benchmark
report related to money management that are being used by other companies and improve
efficiency of manager to manage money.
KPI (Key performance indictors): This indicators are consider to be firm metrics by business
associate and other director to path and examine component hold important for future growth and
development (Wickramasinghe, and Alawattage, 2012). In Airdri manager uses this approaches
to comparison and fit accomplished regulation that assist them in resolution commercial
enterprise issue related to more spending than earning. They form standard at every level so that
expenses are monitor and control by the management easily.
Comparison
Airdri Agmet solution
Management of selected firm applies the
approach of benchmark in order to set standard
that support to firmness the business problem
that is of lack of money management. As they
In this organisation the concept benchmarking
has been applied in order to provide valid
solution to the problems of sales but no profit.
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adopt the policies followed by other companies
within the same industry (Zainun Tuanmat
and Smith, 2011).
In above mention company director resolve
the content of more disbursement than
spending by applying the accounting
approaches of KPI.
In Agmet solution management utilize the
methods of JIT in order to defeat the difficulty
of more payment on promotion activities.
D3 Planning tools for solving financial issues
Manager of respective company prepare effective budgets to estimate and control value
to raise the presentation of worker to improve the productivity. Planning play an important role
to handle in tough circumstances and any kind of fiscal problems that may raised in upcoming
time frame (Windolph, and Moeller, 2012). They applies the techniques of key performance
indicator and benchmarking to provide valuable solution in order to overcome the above
described issues that could hamper the business performance. The different situation such as
money management and control their expenses that help in expansion of business and generate
more profit.
CONCLUSION
From above report it has been concluded that management accounting is very useful in
the context of an organisation. It plays an important role in the internal management of any
business. In addition, management accounting consists various kind of reports like performance
report, budget report etc. Each of these reports are very crucial for managing the business in a
right way.
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REFERENCES
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Schaltegger, S. and Csutora, M., 2012. Carbon accounting for sustainability and management.
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Online
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