Management Accounting Concepts and Practices

This assignment delves into the fundamental principles of management accounting. It examines various aspects such as cost accounting methods, budgeting processes, performance measurement techniques, and recent developments shaping the field. The provided readings encompass diverse perspectives on management accounting theory, practice, and its evolving role in organizations.

Unit 5
MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION..............................................................................................................1
TASK 1.............................................................................................................................1
P1 Management Accounting and essential requirements of different types of
management Accounting systems...........................................................................1
P2 Different methods used for management Accounting reporting ........................3
TASK 2.............................................................................................................................5
P3 Calculate the costs by using absorption and marginal costing and compare the
two management accounting techniques.................................................................5
TASK 3.............................................................................................................................7
P4 Advantages and disadvantages of different types of planning tools used in
budgetary controls of Unicorn..................................................................................7
P5 How Unicorn Retail Ltd adapts the management Accounting systems to respond
the financial problems............................................................................................12
CONCLUSION............................................................................................................... 13
REFERENCES...............................................................................................................15

INTRODUCTION
Management Accounting includes financial information which is used by the
organisation for taking decision-related to development and betterment of organisation
in the future. It helps management in decision making and also in plans and strategies
related to the operations and performance of the business. This type of accounting is
performed by managerial Accountants.
Unicorn retail Ltd the small-medium enterprise operated in the retail sector having
a limited number of employees and has fewer turnovers. This report consists of the
meaning and essential requirements of different management Accounting systems in
the Unicorn retail Ltd. We also discuss different methods used for management
Accounting reporting. Then Income Statement is also prepared by using proper cost
analysis techniques.
There are advantages and disadvantages of different types of planning tools
which are used in the budgetary control of Unicorn and at last we discuss how Unicorn
adopt the management Accounting systems to solve different financial problems of their
business.
TASK 1
P1 Management Accounting and essential requirements of different types of
management Accounting systems
Management Accounting is a process of Accounting perform by management or
managerial Accountants. They analysis Accounting and financial information of
organisation and then prepare a report to help the management to make plans and
policies related to operations of a business and also help them in decision making. In
this Accounting senior management appointed managerial Accountants to analyse the
environment of organisation and collect the financial information and data. This
information and estimates are essential for decision making and for making plans for
the day to day operations and plans related to developments of business in the future.
The managerial Accounting main aim is to provide the appropriate information to
the managers by examining the different processes of Unicorn and there results and

determines ways how to increase profits with lower costs and optimum utilisation of
resources. There are different types of management accounting systems which are
used in different situations. These systems include the followings: Cost Accounting system: This also called product costing systems or costing
systems. It is a system of Accounting used by Unicorn to estimate their costs of
products and services. This includes the evaluation of cost types, cost centres
and in cost unit accounting. This was done by them to determine the profits of the
enterprise, for valuation of inventories and to take measures to control the cost of
Unicorn (Romano, 2015). The cost controls by taking measures to reduce
wastage of resources. There are two main Accounting systems job order costing
and process costing. Inventory management systems: Inventories are the stock of an organisation
which includes the raw material stock, stock work in progress and the products
and services ready to sell to the customers. This system of management
Accounting used to create purchase order, receiving the inventories then relocate
it, adjust it as per there requirements and then sold it to the customers, create
sales orders, packing and shipping, counts of inventories, then creating reports
on inventories and for printing bar-codes label on products and services (Sehgal,
2017). This is very important in inventory controls works in the warehouses and
in production rooms. Inventory controls can be done by keeping records of
inventory levels all the time and make inventories available when there is less or
under stock and restrict the flow of inventories when there is over stock. With
help of this proper updating of inventory level help in making inventory decisions
more efficiently and effectively. Job costing system: This type of system helps in determining costs associated
with a specific type of jobs related to production and related to specific services.
This information is required when the cost information is to be submitted to the
customers. Job costing systems help in evaluating three types of information
which includes direct materials, direct labour and overhead costs (Mauro,
Cinquini and Grosse, 2016). This gives a report of costs of each job so that the

actual cost increasing job area of Unicorn can be accessed which help in making
decisions related cost controls in that job area and not affect the working of the
whole organisation. They work to fulfil requirements of customers because
customers sometimes allow only certain costs to be charged to their jobs.
 Price optimisation systems: It is a system in which proper calculation has done to
determine that the demands of the product changed because of change in price
levels (Ward, 2012). This information is combined with the information of costs
and inventories level to determine that price level which improves the profits of
Unicorn. This system includes three pricing elements which are pricing strategy,
value products for both buyers and sellers and also ensures that these all have
improved profits (Tucker and Lowe, 2014). This help Unicorn in making decisions
related to prices of their products at the initial stage, at the time of promotions
and decisions related to discounts.
The best Management Accounting system is very important to selected Unicorn.
There are various systems but the value of costing system increases the efficiency of
the organisation. But it needs to be ensuring that the costing system is in a good and
trusted hand. The costing system is essential because it helps in determining the costs
of products and services.
The main aim of any organisation is to improve profits and reducing the costs cost
system help in making plans and decisions, which help in increasing profits with less
cost (DRURY, 2013). There are various tasks of the management process but inventory
management acts as the most important one. Inventory management is also a very
important task of inventory manager of Unicorn to maintain inventory level in the
organisation. This can also be done by inventory management system which helps in
controlling inventories in under stocking and in overstocking situations (Coyne and
et.al., 2010).
Job costing is essential and helps to determine different costs related to different
jobs in Unicorn. The price optimisation system is also essential by help Unicorn in
deciding prices in different market situations. This helps in generating profits in all such
situations. It is in the hands of Unicorn which system to choose and which not. All the

systems have own importance but Unicorn can choose that system which is helpful in
providing essential, accurate, reliable and relevant information to managers. Provide
this they can make better decisions and can make better plans to increase the
profitability of the business, reduces costs of operations and help Unicorn in the growth
of their business.
P2 Different methods used for management Accounting reporting
The management Accounting reports help owners and managers of Unicorn to
analyses the performances of their organisation. These reports help managers of
Unicorn to make important decisions related to different areas of organisation (Bhimani
and et.al., 2013). These reports prepared as per the needs of information required by
managers or owners of Unicorn. They can request for reports quarterly, monthly, weekly
or on daily basis as well. Different methods are used for management reporting. Budget reports: The budgets for operations of future are prepared on the basis
actual expenses incurred in past years. The budget reports include the list of
budgeted revenues and expenses of an organisation so they can compare these
with actual revenues and expenses. This report is prepared to help Unicorn’s
managers in analysing their actual performance by comparing it with budgeted
performances.
If there are any variations in actual and expected performances then take
corrective measures. Also, the budget reports help in reporting the performances of
the company and different sections of Unicorn and analysis which department over
budgeted their costs in previous years and provide them more budgets in future to
control their costs (Saladrigues and Tena, 2017). The managers and owners of
Unicorn can also make budgets report for providing incentives to their employees. Accounts receivable reports: This help in reporting and managing the credits to
the customers. This report keeps records that how long customers’ balances are
at credit. This report consists of separate columns for invoices that are 30 days
late, 60 days late and 90 days late. Managers use this report getting information
about the customers that unable to make payments in time and if there are
problems in collection process then the managers must take decisions to

improve their credit policies. Periodically analysing the Accounts receivable
reports also help the managers of collection departments in over-viewing the old
debts. Job cost reports: This report shows cost related to specific jobs of Unicorn.
These costs are compared with the estimated incomes to evaluate the
profitability of the job. The report helps managers to identify that area of jobs
which are the high earning areas of Unicorn so that they can focus on these
areas instead of focusing on jobs which have low-profit margins. These help the
managers to make all efforts to increase their profits by improving working in the
job of high profitability (Quattrone, 2016). Job cost report analysis the expenses
of the projects which are in progress and take measures to reduce the cost of
that projects by reducing wastage. Inventory and manufacturing reports: These reports include items like inventory
wastes, labour cost per hour or overhead cost per unit. The report is used by
managers to make their manufacturing process more efficient and used to
compare different assembly lines of Unicorn and evaluate where they can
improve. They can also offer bonuses to the best performance of the department.
When there is effective and efficient working then there is a high profit of Unicorn. Cost reports: Management Accounting calculated the cost of items produced this
can be done taking the cost of raw materials, labour cost, overhead cost and
other costs into Account. Then the total of above cost is divided by the total
number of units produced this information is recorded in cost reports so the
managers can compare the cost prices and sell prices of products and help them
in making plans to increase profits and in controlling the costs.
 Other reports: There are many other methods of reporting can be used by
Unicorn. They can make an order management reports which is prepared to
compare the order of products placed, and order of products received. This help
the managers to find out which product order is too much and which products are
not demanded enough so they can make a decision to focus on the order of
products which have huge demand (Bennett, Schaltegger and Zvezda, 2013).

Business situation reports can also be prepared by Unicorn which helps their
managers in making decisions related to current business situations and future
situations. They can also prepare opportunity reports which include the details of
different opportunities of Unicorn and analysis which opportunity gives better
profits in the future.
TASK 2
P3 Calculate the net profit by using absorption and marginal costing and compare the
two management accounting techniques
Income statement of Unicorn by marginal costing
Particulars Amount Amount
Sales (500*35/unit)
Less: Cost of Sales:
opening stock
Cost of product (13/per unit*600 units) (see working
note 1)
Less:Closing stock (100*13)
Cost of goods sold
Contribution margin
Variable sales overhead (500*£1)
Less: Fixed costs
Production overhead
Administration cost
Selling cost
Total
Net Profit/loss
Nil
£7800
(£1,300)
(£500)
£1800
£800
£400
(£3000)
£17500
(£6500)
£11000
£10500
£7500

Working Note 1: Calculation of per unit cost under marginal costing
Direct material £6
Direct labour £5
Variable production overhead £2
Total £13
Income statement by using absorption costing techniques
Particulars Amount Amount
Sales (500*35)
Less: Cost of Sales:
opening stock
Cost of product (16*600) (see working note 1)
Closing stock (16/unit*100)
Cost of goods sold
Gross profit
Less: Selling & Administrative cost
Administration costs
Selling overheads
Variable sales overhead (500*£1)
Fixed selling costs
Net earnings
Nil
£9600
(£1600)
£800
£400
(£500)
£17500
(£8000)
£9500
£9000
(£1200)
£7800
Working Note 1: Calculation of per unit cost under absorption costing
Direct material £6
Direct labour £5
Variable production overhead £2
Absorption cost £3
Total production cost/unit £16

The comparison of profits or earnings from marginal costing method and
absorption costing method is that marginal costing system in Unicorn shows less profit
than absorption system.
Comparison of marginal costing and absorption costing
Marginal costing method recognizes the variable cost as product cost and fixed cost as
period cost. As compared to this, absorption costing method recognizes both fixed and
variable cost as product cost. The method of marginal costing classifies overheads into
fixed and variable. As compared to this, absorption costing method classifies overheads
a production, administration, selling and distribution. Furthermore, marginal costing
method presents the cost data to outline the total contribution that each product makes.
In comparison to this, absorption costing method presents the cost data in a
conventional way.
TASK 3
P4. Advantages and disadvantages of different types of planning tools used in
budgetary controls of Unicorn
Budgetary controls are a process in which we compare the expected or budgeted
performances with the actual performance of the Unicorn to find variances between
performances and take corrective measures to improve actual performances (Van der
Steen, 2011). The objectives of budgetary controls are:
 It helps managers in deciding the goals and objectives of the Unicorn.
 Help in preparing plans to achieve the decided goals and objectives.
 They help the organisation in maintaining coordination between organisations.
 Help in Development of various departments for effective and efficient working
and help in creating cost centres to control the cost of these departments.
 Help in eliminating wastage and cutting cost to increase profitability.
 Corrective measures to remove variances between the actual and budgeted
performances.
 It also helps in determining duties and responsibilities of individuals of an
organisation to achieve the budgeted performances.

The above are the objectives of budgetary control which shows that this important tool
used by the Unicorn to control cost and to maximises profits.
The planning tools used in budgetary controls like incremental budgeting, zero-based
budgeting and activity-based budgeting.
 Incremental budgeting: This is an important tool in which use previous budgets of
Unicorn for preparing the new budgets for unicorn. It only includes the
incremental amounts to prepare the new budgets. The budgets of the present
year became the base for the budgets of coming years. It was assumed that all
departments are continued their operations at same budgets and only considered
that additional amount which is required by the department which is going to be
added in the estimates of budgets of next year and in case where there is less
expenditure incurred by department then the budget for that department is
reduced based on current year performances (Lee, 2011). There is no special
formula to calculate the incremental amount it is just an approach which is
followed to make a budget.
For example: Unicorn retail company spent £200 000 last year now they have to
make budgets for the current year. The managers of Unicorn decide to increase or
decrease their expenses of departments by 10% which provides a budget to each
department either of £220 000 or £180 000 depending on the decisions of management.
In this way, the department does not get £200 000 as their budgets. This is when
Unicorn used incremental budgeting as the planning tools of budgetary control.
There are both advantages and disadvantages of this incremental budgeting of Unicorn.
Advantages:
 No complex calculations
 No need for detailed analysis
 Ensures funding of departments
without any detailed analysis
 Stable budget year after year
Disadvantages:
 Based on assumptions that there is
an incremental change in budgets.
 In this approach, managers tend to
spend more than budgets are easily
available.

because it ensures no large
deviation in budgets.
 Eliminates rivalry between
departments and build equity in
allocating funds and increasing
funds.
 Changes can easily have accessed
in incremental budgeting.
 Suitable for unicorn as the funding
requirements in unicorn is generally
fixed.
 Assumption of the same method of
working which convert business in
the same modes there is no larger
risk-taking because of fewer funds
 Lack of innovations and no
incentives to managers for reducing
costs.
 Not a practical tool.
 Incremental budgeting provides
increased funds to the department
which not required funds.
 Zero-based budgeting: This prepare budgets from the scratch of zero bases that
means in this type of tool managers evaluate all the items of Cash Flow
Statements and analysed all expenses incurred by the departments. In zero-
based budgeting by Unicorn expenses of the new period is calculated based on
actual expenses of the previous period. Under this method, every activity is
analysed and evaluated. The assumption used in zero-based budgeting is that
there are no balances carry forward from the previous year. Zero-based
budgeting used in Unicorn is first identifying different tasks and the ways to
perform these tasks. Then evaluate the funds required to perform tasks and then
funding is to be done.
For example: Unicorn retail Ltd which spent £200 000 in the last year. The
problem is to budget the expenses for the current year. The owners of Unicorn if choose
zero based budgeting they do not use £200.000 in their calculations. They calculate all
expenses of the departments and analysis each of the expenses. This help in
determining actual requirements of funds by the departments which may be £206.000.
In this way by using zero based budgeting proper funds with proper analysis of
expenditure is provided to departments. No extra no less budget is provided to any

departments. There are also advantages and disadvantages of zero based budgeting
which can have impact on unicorn.
Advantages:
 More accurate than other methods
as overlooking each item while
making budgets.
 Help with efficient allocation
resources.
 Help in identifying opportunities and
focus on cost-effective ways and
remove other unproductive
activities.
 Justifies all the items.
 Improves coordination and
communication between different
departments.
 Motivates employees by involving
them in decision making.
Disadvantages:
 It is very time-consuming method
than incremental budgeting to do
every year.
 Highly qualified and large of
employees are required to perform
this type of budgeting.
 Lack of expertise as to explain
every cost of each department there
is a need to train the employees.
 Activity-based budgeting: This type of budgeting is based on cost drivers and are
closely related to activity-based costing (Budgeting process, 2015). This method
of budgeting is based on the activity and cost driver estimates which are used in
setting the budgets and in taking corrective measures to reduce variances. This
budget can be prepared with help of activity matrix which shows activities in each
column and the funds required to perform that activity in each row.
For example: The activity matrix of stores department of Unicorn Retail Ltd. Is as
follows:

Activitie
s
RECEIVI
NG
DELIVE
RIES
ISSUIN
G
STOCK
S
STOCK
ORDERI
NG
STOCK
COUNTI
NG
KEEPIN
G
RECOR
DS
SUPER
VI
SION TOTAL
Cost
drivers
deliverie
s
store
Requisiti
ons
number
of
Orders
number
of
Counts
number
of
Units 400 800 400 12
£ £ £ £ £ £ £
manage
ment
Salary 0 0 0 1000 4000 25000 30000
basics
wages 20000 25000 6000 4000 11000 0 66000
overtime
Payment
s 5000 0 0 5000 5000 0 15000
stationery 1000 2000 2000 1000 3000 0 9000
others 6000 5000 2000 1000 1000 5000 20000
Total 32000 32000 10000 12000 24000 30000 140000
cost per
£
Activity
unit 80 40 25 1000
In this example, it is cleared that activities of Unicorn and the cost per activity
help managers in allocating budgets of next year. The total column shows annual costs
of activities. In example activities include receiving deliveries, issuing requisitions, stock

ordering, and stock counting which have their cost drivers and the activities like keeping
records and supervision which takes place in department do not have any volume
(Lukka, 2010). This shows that activity based costing does not ignore any activity in
budgeting process. The activity based costing is also had advantages and
disadvantages
Advantages:
 It concentrates on overhead cost of
activities which can be large portion
of total operating costs.
 It concentrates on drivers or
activities by which costs generates
to manage costs.
 This provides information to the
quality management environment
relating to costs of an activity.
Disadvantages:
 Time-consuming process.
 Difficult to identify individual
responsibilities for activities.
 Small cost's driver is not
controllable.
 Cost variances to this report are
fixed overhead expenditures of
each activity.
P5 How Unicorn Retail Ltd adapts the management Accounting systems to respond the
financial problems
The management Accounting is used by any organisation to identify and analyse
the financial data which help in determining different issues of organisation and then
help in taking corrective measures to solve these issues. Unicorn analysis can use
followings to adapts the management Accounting systems to solve their financial
problems. Ratio analysis: This is the quantitative analysis of financial information which can
be obtained from Financial Statements of unicorn which are prepared at the end
of financial year. Ratio analysis is based on all items of Financial Statements like
Balance Sheet, Income Statements, and Cash Flow Statements. The ratios of all
items or combine the item with another item is calculated. This is very helpful for
unicorn in providing information related to operations and performance of

company such as about efficiency, liquidity, profitability and solvency (Kaplan
and Atkinson, 2015). These ratios are calculated every year to check that
performance are in way of achieving goals or going in any other direction. Ratios
are also used by Unicorn to compare their performance with the performance of
another company. There are various financial ratios which can be calculated to
evaluate the performance but generally used by Unicorn are liquidity ratios,
return on capital employed, the debt-equity ratios and price-earnings ratios.
◦ Liquidity ratios are used to analyse the ability of company to pay off the
current liabilities on time. These ratios show availability of cash and cash
equivalents to pay the liabilities of organisation. Formulae are current assets
divided by current liabilities.
◦ Return on capital employed is ratio is profitability ratio help in measuring the
ability of Unicorn to generate profits from capital employed by the owners of
unicorn. This help to attract investors to company by showing them how many
profits can be generated by using the capital they employed in business. It
also shows efficiency of assets. Formulae of return on capital employed
include net operating profits divided by employed capital which is calculated
by total assets subtracted by current liabilities.
◦ Debt-equity ratio is a ratio which helps in comparing the total debts of
company with the total equity of company. This ratio show percentage of
finance comes from creditors and owners. Higher ratios show that the debt
financing is more than owner financing.
◦ Price-earnings ratio is ratio which is used to calculate market values of
products and shows the prices in different situations. This help in making
plans and strategies related to prices in different market situations. Benchmarking: The benchmarking is measures the actual policies, strategies,
products and programs and then compare these with standards and then find out
variances. The main aim of benchmarking is to determine what are the
improvements and where these improvements are taken place. They also help in
determining that how other organisation maintains high performance and also the

ways to improve Unicorn performance by using the ways the used by another
organisation to improve their performances.
 Variance analysis : this analysis is done to compare the actual and planned
behaviour to maintain the control over business.
Example:
Type Budgeted Actual Variances
Sales
variance
(500 units *GBP20) =
GBP 10,000
(400 units * GBP
20) = GBP8,000
GBP 10,000 – GBP
8,000 = GBP 2,000
(A)
Material cost
variance
(500 units*GBP 10) =
GBP5,000
(500 units * 12) =
GBP 6,000
GBP 5,000 – GBP
6,000
= GBP 1,000(A)
Labor cost
variance
(500 units*GBP6) =
GBP3000
(500 units * GBP 5)
= GBP 2500
GBP 3,000 –
GBP2,500
= GBP 500 (F)
 For example: if the budgeted sales of Unicorn are £10000 and actual sales of
unicorn are £8000 variance analysis shows the difference of £2000. Actual sales
are £2000 less than the budgeted sales £10000. The above result shows that
selling price is exactly as per the expected price of GBP 20 each unit, in contrast,
lack of market demand is a key reason behind adverse sales variance of
GBP2000. Besides this, supplier charged high prices for material due to lack of
supply in the market resultant adverse material cost variance of GBP 1,000 that
can be resolved through better negotiation and finding overseas suppliers. Unlike
this, as skilled labourers were available at cheaper wages rate enable Unicorn to
minimize its actual wages cost by GBP 500 with an favourable variance. It helps
in cost curtailment and profit maximizing.

 This is because of the Unicorn loss customers. Variance analysis responsible for
analysing the reasons for the difference is also evaluated.
Decisions:
 Finding suppliers with less charges of material
 Better negotiation with suppliers
 Effective use of material
 Close monitoring over material usage
 Spend on aggressive marketing to maximize demand
CONCLUSION
From the report, it can be concluded that the management Accounting in Unicorn
is very essential and it is used in to determine the financial information which is helpful
in decision making and helpful in making plans for organisation to achieve their goals.
Different managerial systems are very helpful in performing the functions of
management accounting Unicorn used the costing system, job costing system,
inventory management system and the job costing system. The profit from managerial
costing is less than the profits from absorption costing of unicorn. The budgetary control
can be done in Unicorn by using planning tools like incremental budgeting, zero-based
budgeting and activity based budgeting. Unicorn can use ratio analysis, benchmarking
and variance analysis to identify problems of organisation and solve these problems.

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