Introduction to Management Accounting (doc)

MANAGEMENT
ACCOUNTING
INTRODUCTION 3
LO1..................................................................................................................................................3
P1. Explaining the concept of management accounting and the importance of its various
systems.........................................................................................................................................3
P2. Explaining several methods for reporting under management accounting...........................5
M3. Evaluating the advantages and the application of the system of management accounting..6
LO2..................................................................................................................................................7
P3. Calculation of the net profit by using the marginal and the absorption costing technique...7
LO3..................................................................................................................................................8
P4&M3. Explaining the benefits and the limitations of the different planning tools of
budgetary control.........................................................................................................................8
LO4................................................................................................................................................10
P5&M4. Comparing the adaptation of the different management accounting system for
resolving the financial problems and which leads to sustainable success of the organization..10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Management accounting is the process that refers to the formulation of the management reports
that facilitate accurate information regarding the financial and the statistical aspects that is
needed by the managers for making the short term or routine decisions. The present report is
based on Excite entertainment, an entertainment industry in UK, deals mainly in the activities of
promoting the concerts and the festivals at various locations in entire UK. Furthermore, the
report includes the detailed analysis of the management accounting systems and the reporting
with the benefits of the system. Moreover, the report also evaluates the profits through marginal
and absorption costing methods. The deeper insight has been thrown on the various planning
tools and the system of managerial accounting that leads to solving the financial problems.
LO1.
P1. Explaining the concept of management accounting and the importance of its various systems
Management Accounting Financial Accounting
Management accounting relates with the internal
processes that are used for assessing the
transactions of the business.
Management accounting provides for the detailed
report in terms of the profits from the product,
customer, product line, and the geographic region
(Maas, Schalteggerand Crutzen, 2016).
Management accounting is not compulsory and do
not have to be prepared as per any standards.
Under managerial accounting, the reports are
issued more frequently.
Financial accounting referred as the accumulation
of all the accounting information entered into the
financial statements.
Financial accounting facilitates reporting of results
for an entire undertaking of the business.
Financial accounting has to be made in compliance
with the several accounting standards.
Financial accounting, the financial statements are
prepared at the end of the accounting period.
Different system of management accounting-

Cost accounting system- It refers to the system that is used by Excite entertainment in estimating
the appropriate cost for their product so that profit can be analyzed, inventory can be valued and
could keep control over the cost. It is important for the enterprise in terms of keeping the
operations profitable (Quattrone, 2016). It helps in ascertaining the accurate cost involved in
producing the product. The two major cost accounting systems are job costing and process
costing system.
Job order costing- It is the system of cost accounting that helps in assigning the manufacturing
cost for each job. This process is labor intensive as he cost is accumulated for each of the job.
Excite entertainment can use this approach for its unique products like the consulting projects or
the custom designed machinery etc.
Process costing- It is an accounting system that accumulates or assigns the manufacturing cost to
each process. It is the most appropriate technique for the firm when its production process
involves several divisions and the flow of cost from one division to the other.
Direct costs- It includes the expenses that could be tracked directly to the particular cost center
such as the department, product and the process. It varies with the change in the output but is
constant in context of each production unit (Messner, 2016). It is the cost that is under the
control and the responsibility of the managers.
Standard costing- This costing method is the practice that is used for substituting the expected
or the budgeted cost with the actual cost in accounting records. The variances that occur between
the standard and the actual cost are analyzed by this method so that corrective measures can be
taken by the managers of Excite entertainment.
Inventory Management Systems- This system traces the goods by using the supply chain or by
the part of it in which Excite entertainment operates its business. It keeps the track of the
movement of goods from the warehouse to delivering it to the ultimate consumers. For ensuring
better inventory management and reducing the cost level emphasis need to be placed on
employing effectual systems namely JIT (just in time), First in first out etc. On the basis of JIT,
business unit places order for inventory whenever it’s needed. This in turn helps in reducing
storage cost and thereby maximizes profitability. Further, FIFO method presents that stock which

purchased earlier need to be sold first. This in turn reduces problem in relation to outdated
stockand thereby helps in maintaining profitability.
Job costing System- This system of the management accounting keeps an account for all the
direct and the indirect cost that is involved in each job (Hopper and Bui, 2016). It is the system
which facilitates the information regarding the revenues and the cost which in turn leads to
reporting of the standardized profitability of the business.
P2. Explaining several methods for reporting under management accounting
Management accounting reporting plays a crucial role in assessing the performance of the
business. Essential strategic insights can be developed by preparing the reports regarding the
cost, inventory, budget and other managerial aspects. Various reports that are framed by the
manager’s are-
Budget report- This report includes the preparation of the budget in relation to all the activities
of Excite entertainment and is considered as the most important report of the managerial
accounting. It enables the owners of the business in understanding and controlling the costs of
the enterprise by providing the budgeted figures for several departments within the organization
(Chenhalland Moers, 2015). Through this report estimation regarding the future budget is
possible and also helps in finding the places for cutting down the cost.
Account Receivable Report- This report refers to the detailed information in context of the credit
that are provided by Excite entertainment to its customers. It states the overall view of the credit
balances in accordance with the age that specifically includes the distinct categories for the items
that could be 30, 60 and 90 day’s period. It helps the firm in adjusting the credit policies in order
to align them to the repayment capability of the customers.
Job costing report- This report provides for the accrual of the cost in a particular project in
comparison with the budgeted or the expected revenue generated by that particular project. It
helps the managers of Excite entertainment in evaluating the profitability associated with the
specific kind of the job and to optimize the operations of their business by emphasizing on jobs
that are tend to be most profitable.

Inventory report- In this report the records relating to the inventory of the enterprise are
maintained and the combination of technology is used for managing the inventory (Latan and
et.al., 2018). This report helps in centralizing the data on the cost of the inventory, labor cost and
other overhead cost that is involved in production process, facilitates the raw data for optimizing
the machining or the assembly.
Performance report-This report of management accounting is created for reviewing the
performance of Excite entertainment as well as the performance of its employees in performing
the task as per the standard set. Performance report is used by the managers in making the
strategic decisions relating to the future needs of the enterprise. This report plays a vital role in
keeping a relevant measure of the strategy towards the mission and the vision of Excite
entertainment.
Thus, it is important for Excite entertainment to choose the right type of the report which helps in
achieving the goals more effectively and efficiently. Through these reports, deeper insights can
be attained in capturing the opportunities in the overall marketplace.
Stating reasons behind having accurate managerial accounting report
By doing assessment, it has identified that managerial accounting reports provide high
level of assistance to the managers in decision making. Referringreports, manager makes
evaluation of departmental performance and thereby take further measures for improvement.
Further, report also gives indication to the firm in relation to maintenance of stock within the
firm. Hence, considering all such aspects it can be stated that information contained in
managerial reports should be accurate and reliable in nature.
M3. Evaluating the advantages and the application of the system of management accounting
Management accounting systems Benefits Application
Cost Accounting System This system helps in measuring
and continuous improvement in
the efficiency of Excite
entertainment.
It throws the highlights on the
Cost accounting system is used
by Excite entertainment in
ascertaining the cost involved
and reducing the unnecessary
cost so that optimum use of the

activities that brings profits into
the business and identifies those
activities that inculcate losses
(Horton and de Araujo
Wanderley, 2018).
Cost accounting system helps
Excite entertainment in fixing the
prices based on its production
cost.
resources can be possible.
Inventory management System This system assists the
organization in achieving the
efficiency and the productivity in
the operations of the business.
This system helps in carrying out
the smooth functioning of the
operations.
It minimizes the cost and strives
for maximizing the sales and the
profits y managing the orders at
the various sales channels.
Inventory management system is
used for integrating the entire
business of Excite entertainment.
It allows the company in meeting
its sales target as it makes the
way for fulfilling the revenue of
the business.
Job costing System It provides for analyzing the
detailing of the type of the cost
that is present in the
manufacturing process
(Rikhardssonand Yigitbasioglu,
2018). This involves the labor
cost, overhead charges and the
direct cost.
It determines the profitability for
each job that helps the probable
customers for deciding the job
feasibility.
It is used for evaluating the work
quality by using several
statistical methods.
This method helps Excite
entertainment in computing the
cost overheads for meeting the
particular needs in the precise
manner.

LO2.
P3. Calculation of the net profit by using the marginal and the absorption costing technique
Marginal costing- It is the costing technique where the variable cost is been charged to the cost
units whereas fixed cost for a specific period is wholly write off over the contribution. It refers to
as the additional cost that is involved in the production of an extra output unit.
Absorption costing- It is the managerial accounting method that accounts for all the expenses
that are attached with the manufacturing of a specific product (Usenko and et.al.,2018). It uses
the overhead and the sum of the direct cost associated in manufacturing the product as the cost
basis.
Income statement as per absorption costing
Particulars Amount Cost per unit Total Amount
Operating revenue 8000 15 120000
Cost of goods sold 80000
Gross or Net profit=
Operating revenue-
COGS
(120000-80000) 40000
Calculation of the cost per unit
Particulars Amount
Prime cost 4
Variable cost of production 2
Foxed cost of production 4
Total cost of production 10
Evaluation of COGS-

Particulars Amount Cost per unit Total Net amount
Opening stock 500 10 5000
Production 10000 10 100000
Closing stock 2500 10 25000
Cost of goods
sold= opening
stock +
purchases-closing
stock
80000
Income statement as per Marginal costing-
Particulars Amount Cost per unit Total Amount
Operating revenue 8000 15 120000
Variable cost 48000
Contribution (Operating
revenue- variable cost)
72000
Less: Fixed overhead
production cost
40000
Net profit 32000
Working note of calculation of cost of goods sold
Particulars Amount Cost per unit Total amount
Stock at the beginning
of period.
500 6 3000
Add:
Purchases(production)
10000 6 60000
Less: Stock at the
ending of the period.
2500 6 15000
Cost of goods sold 48000

Calculating the cost per unit by using the marginal costing
Particulars Amount
Prime cost 4
Variable cost of production 2
Total cost of production 6
Interpretation- From the above analysis it can be interpreted that net profit resulted as 40000 by
applying the absorption costing method where it includes both variable and the fixed cost of
production. On the other hand, the profits ascertained by using the marginal costing equates to
32000 which does account for the fixed overhead production cost. Absorption costing is more
suitable technique as compared to marginal costing as it provides for the realistic evaluation of
the profits because it calculates the profits after considering both the costs that is variable and the
fixed cost.
LO3.
P4&M3. Explaining the benefits and the limitations of the different planning tools of budgetary
control
Activity based budget- It is the method of budgeting in which the budgets are prepared after
considering an overhead cost. It is the tool that does not accounts for the previous budget for
arriving at the preset year budget.
Advantages/uses Disadvantages
Evaluation- This method helps in evaluating every
cost driver. It takes into account all the steps that
are involved in the activity.
Competitive edge- This system eliminates
irrelevant activities which results in cost saving.
This lower cost helps in achieving the competitive
edge against the competitors of Excite
entertainment.
Requires understanding- It requires the deep
understanding relating to the several functional
areas within the business (Curry, 2019).
Incapability of the managers in understanding the
areas lead to the inaccurate budget.
Complex-This technique of budgetary control is
very complex as it needs research of the various
factors.
Short term approach- Activity based budget

emphasize on the short term objectives of business.
It does not focus on long term objectives which can
prove fatal for Excite entertainment.
Rolling budget- It referred as the revised budget that includes the revised financial plans for the
coming period of accounting which is used for replacing prior budget. It is also called as the
updated or new budget.
Advantages Disadvantages
Flexibility- Rolling budget record for the changes
from prior period into new budget (Nishimura,
2019). This leads to development of more flexible
and updated budget.
Responsiveness- This budget helps in being more
responsive towards the unexpected changes so that
necessary adjustments can be made by Excite
entertainment.
Justification- Application of the rolling budget, nit
advisable in the situations that are not changing
constantly. It wastes the time and the energy in the
unvarying environments for preparing the rolling
budget.
Administration-the main disadvantage of the
rolling budget is that its similar t framing the new
budget on a continuous basis. It requires gathering
of the facts on a regular intervals from previous
budget. It needs the robust system of the
information in extracting the accurate information.
Cash budget- It means the budget of the expected receipts of the cash and the expenses for the
particular period. The cash inflows and the outflows include the revenue received, expenses paid,
receipt from loan and the payments.
Advantages Disadvantages
Practical benefits- Cash budget restricts Excite
entertainment in spending so that it does not incur
any debt. It involves the realistic assessment of the
money that will be occurred in coming years.
Strategic implications- It provides for the benefit in
Based on estimation- cash budget highly relies on
the anticipations for the future sales and the
collections of the future that will be received on
sales.
Manipulation- Cash budget might lead to

making strategic decisions relating to the cash
requirements in the future.
underestimation of the expenses over the period of
budget (Alamri, 2019). The actual expenses that
incurred may not match with the budgeted figures
due to the manipulation in the budget.
LO4.
Calculating the cost volume profit analysis-
Particulars Formula Total Amount
Selling price at per unit 40
Variable cost at per unit 10
Fixed cost 120000
Contribution in terms of per unit Selling price per unit – Variable
cost per unit
30
Break even analysis ( in units) Fixed cost/ contribution (per
unit)
4000
Break even analysis (in amount) Break even analysis (in units) *
selling price per unit
160000
In case the business wants to gain
profit of the amount
60000
Units required to be sold for
attaining profit of amount 60000
(Fixed cost + desired profit )/
(selling price per unit – variable
cost per unit)
6000
P5&M4. Comparing the adaptation of the different management accounting system for resolving
the financial problems and which leads to sustainable success of the organization
Balanced Scorecard- It is the framework of the business that is used by the enterprise as a
strategic management tool. It links the several strategic goals, targets, initiatives and the
objectives to the vision of the firm. It creates the balance between the performance and the
financial measures in relation to each activity of business (Sinaga and et.al.,2019). This leads to

solving the financial problem such as the lack of resources and the funds to meet the future
requirements.
Variance analysis-It is the technique of management accounting system that studies about the
deviations that are present between the actual and the budgeted behavior. It indicates the impact
of the deviation on the performance of the business. Variance analysis helps the firm in solving
the financial problems relating to taking corrective action for making the performance as per the
budgeted figures.
Bench-marking-It is the practice of measuring the company’s performance in terms of its
products, processes and services with that of the another business that is been considered as the
best in the overall industry or the market (Quattrone, 2016). It resolves the financial problems in
identifying the internal opportunities so that better improvement can be attained.
Key performance indicator-It is the crucial indicator that reflects the progress of the firm in
reaching its goals. It focuses on the operational and the strategic improvements which results in
creating the analytical base for making the appropriate or suitable decisions. It resolves the
financial problem that includes the finding of the lagging and the leading indicator.
Thus, Excite entertainment uses the balanced scorecard approach which helps the firm in
viewing its organization from all the perspectives that involves the financial, internal processes,
business growth and the customer so that it can achieve its goals effectively and efficiently. On
the other hand, ABC Company uses the key performance indicator method which enables the
firm in reaching out the desired level of the performance by tracking over the target.
CONCLUSION
From the above report it can be concluded that management accounting systems and the
reporting plays a critical role in leading the Excite entertainment in attaining the sustainable and
growing success in the long run.

REFERENCES
Books and journals
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accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
Curry, A., 2019. Across the great divide: a literature review of management accounting and
operations management at the shop floor. Management Review Quarterly. 69(1).pp.75-119.
Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management
Accounting Research, 31, pp.10-30.
Horton, K.E. and de Araujo Wanderley, C., 2018. Identity conflict and the paradox of embedded
agency in the management accounting profession: adding a new piece to the theoretical
jigsaw. Management Accounting Research. 38. pp.39-50.
Latan, H. and et.al., 2018. Effects of environmental strategy, environmental uncertainty and top
management's commitment on corporate environmental performance: The role of
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Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment,
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248.
Messner, M., 2016. Does industry matter? How industry context shapes management accounting
practice. Management Accounting Research. 31. pp.103-111.
Nishimura, A., 2019. Uncertainty and Management Accounting: Opportunity, Profit
Opportunity, and Profit. In Management, Uncertainty, and Accounting (pp. 73-95). Palgrave
Macmillan, Singapore.

Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research. 31. pp.118-122.
Rikhardsson, P. and Yigitbasioglu, O., 2018. Business intelligence & analytics in management
accounting research: Status and future focus. International Journal of Accounting
Information Systems. 29. pp.37-58.
Sinaga, O. and et.al.,2019. The Role of Management Accounting Systems, Energy Efficiency
and Organizational Innovation in driving Competitive Advantage and Firm
Performance. International Journal of Energy Economics and Policy. 9(3).pp.395-402.
Usenko, L.N. and et.al.,2018. Formation of an integrated accounting and analytical management
system for value analysis purposes. European Research Studies. 21.p.63.