Types of Management Accounting System and Methods

This document provides an overview of different types of management accounting systems and methods, including inventory management system, cost volume profit analysis, budgetary control, and cash budget. It also discusses the advantages and disadvantages of planning tools for budgetary control. The content is based on a case study of Capital Journey Ltd.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION......................................................................................................................3
SCENARIO 1.............................................................................................................................3
Types of management accounting system..............................................................................3
Different methods of management accounting.......................................................................6
Advantages and disadvantages of different type of planning tools for budgetary control\....8
Comparing how organization adapts the management accounting system in order to
respond to financial problems................................................................................................9
SCENARIO 2...........................................................................................................................10
Producing financial report....................................................................................................10
CONCLUSION........................................................................................................................14
REFERENCES.........................................................................................................................16

INTRODUCTION
Management accounting is all about reporting the financial transactions associated
with the organisation (Schaltegger, 2018). This is about to report the financial position
associated with the organisation. This report is based on the case study of Capital Journey Ltd
in respect to the management of the financial transactions of organisation. This project would
assess various elements related to the accounting of organisation. Henceforth, report will
emphasis over various types of management accounting system associated with the
organisation. Various methods associated with the management accounting system can be
projected in this report. Income statement with the support of different methods of
management accounting will be projected briefly in this project. Advantages and
disadvantages associated with the different planning tools part of the organisation.
Furthermore, project will demonstrate the fact how management accounting would respond to
various financial problems associated with the organisation. All different areas associated
with the management accounting would demonstrate in this project.
SCENARIO 1
Types of management accounting system
Management accounting is comprises with various systems that involve different
methodologies and techniques to support the best form of representation of the company’s
books of accounts. Management accounting is a methodology that delivers the better
presentation of the financial reporting of the organisation. The reporting done in the
management accounting project about all key information in respect to the user of the
financial statements (NGUYEN and LE, 2020). Different methodologies and tools and
techniques that support in the management accounting provide the clinical information to
user of the financial statement. They get to know about all different information about the
financial position of organisation. All these various technique support the organisation to
represent all different critical areas to represent the financial position of organisation in the
best way possible. All different techniques and methods part of the management accounting
can be projected in the following points.
Inventory management system
This is also a major type of management accounting system used by Capital Joinery. Under
this management accounting system all the requirement and application of the inventory used

within the company. The major reason underlying this fact is that the inventory is the most
essential aspect of the business and for this its proper availability is very important. Thus, for
this Capital Joinery uses the inventory management system in order to have all the records of
the inventory coming to business and going out in form of finished goods. Further if the
inventory will not be managed in effective manner then this will have a great impact over the
overall working of the company. This system is used on the basis of the nature of
organisation, resources of the business entity, information quality and many such factors.
Inventory management system requires strong system of recording the inventory.
Management also must favour the infrastructure development so that proper recording and
monitoring can be conducted in the inventory records maintenance.
Cost volume profit analysis
Cost volume profit analysis formerly known as the breakeven point. This is the
position in the financial records of company that denote no profit no loss situation in context
to the organisation. It is essential for the organisation to achieve tis position in the
organisation as early as possible to denote the financial capability of the organisation. At the
Cost volume profit point in operations company get to recover all the expenditure the
organisation has entertained against the business operations by the organisation (Taylor and
Scapens, 2016). It is a critical technique that denote the exact position in organisation which
demonstrate about the point where the organisation has been capable enough to deliver the
outcomes in the business operations and functions to reach the point where company get to
recover all expenditure it required to incurred in the organisation to reach the point where the
company would contain no profit and no loss situation in operations. Break even point
company calculate in both the form total number of unit company needed to sail or in form of
total amount of turnover company need to address in the operations to achieve the maximum
level of outcomes against the business operations entertained by the company (Cuzdriorean,
2017). Cost volume analysis is a key point in the company as it denotes the reach ability of
the operations of organisation. Every time company deliver a product in target market at first
company try to reach the Cost volume profit point so that overall cost incurred to produce and
deliver the final service can be recovered by the organisation. Beyond this point company get
to make profitability against the business operations entertained by the organisation. It is the
priority of the business functions of organisation to reach at this point in against to deliver the
business functions at the organisation level. In order to calculate and identify about the

breakeven point in units company need to compare fixed cost with the contribution per unit.
In case company require to identify the breakeven point in amount than it has to compare the
fixed cost entertained by the organisation in the respective time with the profit volume ratio
of the organisation. In both the cases result will remain the same. It is only a different ways to
represent the overall outcomes of operations. Once the organisation has been capable enough
to reach the Cost volume profit point than it can form further strategies and policies to
enhance and boost the overall profitability of the organisation. This system requires a
favourable nature of the management to apply this approach. Many times progressive
leadership seek this approach to implement in operations.
Budgetary control
Budgetary control is another key technique that is a part of the operations of the
company. Management accounting methodology comprises with different techniques and
methods to achieve the maximum possible outcomes of the business functions entertained by
the organisation. Budgetary control is a technique which involve preparing the budget,
coordinate about the budget in all different functional department of the organisation,
compare the actual performance of organisation with the estimation made in the budget of
company and to assess the performance of organization to form future budgets (Fleischman
and McLean, 2020). This is a clinical approach part of management accounting that denote
the different aspecs that can support the organisation to deliver the maximum level of
outcomes against the business operations entertained by the organisation. Budget are off
different types that are idealised as the fixed budget, flexible budget, cash budget and various
other types of budget. This is a key practice that can be indulged with any of the operation of
organisation. Management required to be positive enough to apply this approach. This also
favour the organisation to sustain an effective control over projection and also needed strong
system to identify the cost required in performing specific operations.
Cash budget
Cash budget is another approach that is involved in the management accounting
methods. This budget control the liquidity position of the organisation. On the basis of the
expected future cash requirements and needs of the Capital Journey Ltd this budget is
prepared. Assessment in respect to the cash resources company require to channelizes the
business operation in the respective financial year this budget is prepared by company
(Johnstone, 2020). Cash budget control the liquidity position of the organisation.

The above mentioned tools are a key techniques utilised in management accounting
practice. With the support of all these tools bets level of accounting management is
conducted at the organisation level. Financial stability is among the key requirement part of
the organisation and all these tools support the Capital Journey Ltd to address the financial
stability that is desired by the organisation in against to the business operations entertained by
the company.
Different methods of management accounting
Management accounting is comprises with different methods that can be projected in
marginal costing technique and absorption costing technique. All these techniques can be
projected in the following manner.
Budgetary report
This is also a management accounting report which involves the details relating to all the
budgets which are planned and made by the company in order to manage the performance of
the company. Thus for this Capital Joinery makes the use of all the budgets and reports them
in these budgetary reporting. This is done in order to make and have a record of all the
changes and these records are also being used in the future.
Inventory reports
This is a type of report in which the company records all the transaction relating to the
inventory. The inventory is the most important thing for the company as if this will not be
managed then the whole working will be impacted. Further Capital Joinery uses the inventory
report in order to record all the transaction relating to the inventory and this assist the
company to have proper knowledge of inventory coming to business and going out from the
business.
Marginal costing
Marginal costing is all about comparing cost with quantity produced by the company.
This is an effective way to report the financial transactions entertained by the company in
comparative manner where company get to match the complete balance in between the cost
and quantity produced by the organisation to deliver the maximum level of outcomes against
the business operations entertained by the company. This method charges the variable cost to
evaluate the financial outcomes of the organisation (Drury, 2018). This technique support the

organization to evaluate the best level of outcomes against the business operations entertained
by the organisation with the support of variable nature cost entertained by the Capital Journey
Ltd where as the fixed cost is completely write off in this technique. This method of
management accounting work on the fundamentals that fixed cost is not directly associated
with the overall production of the products so it must not be considered while calculating the
overall profitability against the trading operation of company. This method completely
depends upon the variable nature of cost that directly involved in making the product ready to
sail to final customer in market.
Absorption costing
Absorption costing method of management accounting accumulates all types of cost
that has contributed in any manner in order to make the product ready to sail. This is a key
method of management accounting that support the organisation to deliver the profitability
projection on the fundamentals that accounting methodology must justify with the actual
profitability of the company. If the accounting do not project the actual level of outcomes
company is entertaining against the business operations entertained by the company than it is
not convenient and effective (Phornlaphatrachakorn and Khajit, 2020). This technique
involve all types of cost direct material, direct labour and all other types of cost that has
contributed in the overall production of the finished products that company can sail to its
potential level of customer in market.
The above methods are the two different methodologies part of the management
accounting. All different techniques and methods contain its own way to reflect the business
outcomes of the organisation. Management of Capital Journey Ltd make all decisions on the
basis of the outcomes represent by all different techniques so that bets level of decisions
against the business operations of organisation can entertain by the company.
Advantages and disadvantages of different type of planning tools for budgetary control\
There are different types of planning tools which assist the company in managing the
working and operation of the company to a great extent. This is particularly because of the
reason that these planning tools assist and guide the people in managing the business in
effective and efficient manner (Guo and Yang, 2018). For the company Capital Joinery there
are different types of tools used for planning the company. This is particularly because of the
reason that when the company will effectively make the use of these planning tools then this
will assist the company in managing their performance and the operations. The major reason

for this is that these planning tool for budgetary control are used in order to make the
performance of the company in better and effective manner. Thus, for this the company
makes the use of following different types of budgetary planning tools which are as follows-
Operational budget- this is a type of budget which assist the company in managing the
expenses and income which are being generated with the day to day business of the company.
This is particularly being used by the company in order to make the estimation of the daily
expense and the future income which the company Capital Joinery can have with assistance
of using this budget.
Advantages
The major advantage of using this budget by Capital Joinery is that this will give an
idea to the company that how their work will be done and what will be there expected income
and expense due to that particular operational activity. Further another major benefit of using
this operational budget is that these are very easy to prepare and also easy to understand. Any
person can easily understand by looking at the budget that what will be the operational
expenses and income which the company might face in order to doing the daily activities of
business (Soares and et.al., 2019).
Disadvantages
The major drawback of using this budget by Capital Joinery is that this is very time
consuming to prepare the budget and this takes up a lot of time of the budget maker. Thus,
because of this reason this is very time consuming and involve a lot of efforts of the maker of
budget as well. In addition to this another major drawback is that it is not possible that all the
expected things happen in the same manner as the future is unpredictable and it is not static.
Thus, this creates problems for the budget maker as there are many different types of
problems and changes taking place in the external environment (OYEBODE, 2018).
Zero- based budgeting- this is a type of another planning tool for the budgetary control
which is assistive for the company in order to manage the working of the company. Under
this Capital Joinery uses this technique in order to make the budget from a scratch that is
from zero. This is a technique of budgeting within which all the expenses of the company are
identified from the starting that is from the beginning in every new financial year. This is
particularly because of the reason that under this method the Capital Joinery makes the
budget from the scratch. In simple terms the company does not involve the use of previous
budgets as the base for making the new budgets. Rather this involves making the whole of the
budget from the starting that is from initial stage.
Advantages

The major advantage of ZBB to Capital Joinery is that this method is accurate method
for the making of the budget as in this the company does not take any assumption or the data
based in the last or previous budget. Another major benefit of using this method of planning
tool is that this involves the reduction in the redundant activities. This means that this
includes the identification of the opportunities of doing the work in more cost effective
methods.
Disadvantages
The major drawback of this method is that this type of planning tools involve a lot of
expertise and for this the company need to hire some experts in order to make these budgets
(Zero Based Budgeting Meaning and Definition, 2020). Furthermore, another major
drawback of this planning tool is that when this also involves a lot of time for making this
budget as there is not any base for the company to use it as base. Thus, this involves a lot of
time to make the budgets.
Comparing how organization adapts the management accounting system in order to respond
to financial problems
Within the business there are many different types of financial problems which are
being encountered by the companies. The financial problem is the ones which drives the
company in some problem or issues which involves the money within the company. there are
many different types of the financial problem like not proper allocation of money, issues in
management of the finance, sudden increase in market value of products, less knowledge of
the use of finance within the business and many other financial problems. The business
operates in the external environment which involves many different types of problem which
are financial and non- financial problem and the company has to deal with these problems in
much effective manner. Thus, for this it is very important for the company to make the
effective use of the management accounting system which are discussed as follows-
Benchmarking- this is a model or tool which involve the use of setting up the
standards from the industry within which the company is operating (Kharlamova and et.al.,
2020). Further the company compares the performance of the company with the best
competitor within the industry. Thus, this assists the company in managing the performance
of its own by comparing the performance with that of the other competitor within the
company.
KPI- this is referred to as the Key Performance Indicator and this is a tool which
assists the company in managing the performance of the company. Under this method Capital

Joinery sets a factor which is compared to other companies and past performance as well. For
instance, profit is taken as the indicator and the performance of the company is being used in
order to comparing the performance against this indicator only.
Variance analysis- this is also a major technique which is used in order to manage the
performance of the company. Under this the company sets some standards for the
performance and then in accordance to those standards work in order to attain those
standards. Further in order to manage the performance the company compares the actual
performance of the company with the standards set by the company. With the comparison the
company comes to know about the deviation among the actual and standard. With this
company comes to know about the areas in which they require to do improvements.
Capital Joinery Sectigo
For solving the financial problem the
company makes the use of the
benchmarking as under this method if
company has any problem then first they
compare this with the other competitors.
With help of this method the company is in
position of the analysing their current
market position and this help the company
in finding solution to the company. for
instance, company can use benchmarking to
compare the way how other competitor is
using strategies to earn good amount of
profit.
For dealing with the financial problem
Sectigo makes the use of the variance
analysis. This is being used by the company
as in this the company sets the standard and
then they compare the working along with
standards set. Thus if there is any deviation
being found then this can be solved with the
assistance of the variance analysis. Under
the variance analysis Sectigo first set budget
for an activity and the complete the activity
so that they can work in that particular
budget only and profit can be generated.
SCENARIO 2
Producing financial report
Income statement as per Marginal Costing
Particulars May June
Sales Revenue (100*250) 25000 (75*250) 18750
Marginal Cost of Sales
Direct Materials (100*60) 6000 (80*60) 4800

Direct Labour (100*40) 4000 (80*40) 3200
Variable sales commission
(25000*2%
) 500
(18750*2%
) 375
Variable Production
Overheads (100*20) 2000 (80*20) 1600
12500 9975
Add:
Opening Stock 0 0
Less:
Closing Stock 0 (5*120) 600
12500 9375
Contribution 12500 9375
Fixed production overheads 2000 2400
Fixed selling cost 1000 1000
Fixed administration cost 3000 3000
Net Income 6500 3175
Income statement as per Absorption Costing
Particulars May June
Sales Revenue (100*250) 25000 (75*250) 18750
Cost of Sales
Direct Materials (100*60) 6000 (80*60) 4800
Direct Labour (100*40) 4000 (80*40) 3200
Variable Production
Overheads (100*20) 2000 (80*20) 1600
Fixed production overheads (100*20) 2000 (100*20) 2000
14000 10800
Add:
Opening Stock 0 0
Less:

Closing Stock 0 (5*140) 700
14000 10500
Gross profit 11000 7850
Fixed selling 1000 1000
Fixed administration cost 3000 3000
Variable sales commission
(25000*2%
) 500
(18750*2%
) 375
Net Income 6500 3475
Reconciliation of profit figures
May June
Profit under absorption 6500 3875
Difference in units of
inventory * fixed production
overhead p/u 0 (20*20) 400
Profit under marginal costing 6500 3475
CALCULATION OF VARIANCES:
i) Material Price Variance = Standard Price - Actual Price
= (Std Price - Actual Price) x Actual Qty)
(£12 - £9.3) * 2400 kg
6480 (Fav)
i) Material Usage Variance = Standard Usage - Actual Usage
= (Std Qty - Actual Qty) x Std Price)
(2000 kg - 2400 kg) *£12
-4800 (Adv)

Inventory ledger record using Average Cost method
Date Goods purchased
Cost of goods
sold Inventory balance Average cost
Jun-
01
£350 (10 units *
£35) £35
Jun-
09
15 units *£38
=£570 25 units £920 £36.8 (920/25)
Jun-
15 £441.6(12*£36.8) 13 units £478.4
Jun-
20
10 unit * £32=
£320 23 units £798.4
£34.7
(798.4/23)
Jun-
23 £347 (10 * £34.7) 13 units £451.4
Jun-
27 £104.1 (3*34.7) 10 units £347.3
Jun-
30 £69.4 (2*34.7) 8 units £277.9
CONCLUSION
Management accounting is all about recording the financial transactions entertained
by the company. This is about to reflect the profitability company has entertained against the
business operations channelized by the organisation. Different techniques like breakeven
point, budgetary control, cash budget and may such techniques are used to achieve the best

level of financial projection of the organisation in the management accounting tool.
Methodologies like marginal costing and absorption costing methods are used in the
management accounting to achieve the best level of financial representation of the
organisation. Profitability is denoted as the outcomes of company against the business
operations entertained by the organisation. Planning tools support the organisation in
delivering bets level of planning requirements of organisation. Companies at a global level
adopting the management accounting system to achieve the bets level of financial
representation against the business operations entertained by the company.

REFERENCES
Books and Journals
Cuzdriorean, D. D., 2017. The use of management accounting practices by Romanian small
and medium-sized enterprises: A field study. Journal of Accounting and
Management Information Systems. 16(2). pp.291-312.
Drury, C., 2018. Cost and management accounting. Cengage Learning.
Fleischman, R. and McLean, T., 2020. Management accounting: theory and practice.
Routledge.
Guo, X. and Yang, Q., 2018. On the Integration of IT system with the budgetary control
system: insights from the case of Wanhua chemical. Wireless Personal
Communications, 102(4), pp.3687-3697.
Johnstone, L., 2020. A systematic analysis of environmental management systems in SMEs:
Possible research directions from a management accounting and control
stance. Journal of Cleaner Production. 244. p.118802.
Kharlamova, O., and et.al., 2020. Management Accounting Using Benchmarking Tools.
Academy of Accounting and Financial Studies Journal, 24(2), pp.1-7.
NGUYEN, H. Q. and LE, O. T. T., 2020. Factors Affecting the Intention to Apply
Management Accounting in Enterprises in Vietnam. The Journal of Asian Finance,
Economics, and Business. 7(6). pp.95-107.
OYEBODE, O.J., 2018. Budget and Budgetary Control: A pragmatic approach to the
Nigerian infrastructure dilemma. World Journal of Research and Review, 7(3).
Phornlaphatrachakorn, K. and Khajit, N. K., 2020. Strategic management accounting and
firm performance: Evidence from finance businesses in Thailand. Journal of Asian
Finance, Economics and Business. 7(8). pp.309-321.
Schaltegger, S., 2018. Linking environmental management accounting: A reflection on
(missing) links to sustainability and planetary boundaries. Social and Environmental
Accountability Journal. 38(1). pp.19-29.
Soares, T.C., Schneider, J., Lima, C.M. and Soares, S.V., 2019. Budget and strategy: beyond
budgeting as a tool for planning and budgetary control in a graduation course.
Revista Ibero-Americana de Estratégia, 18(1), p.126.
Taylor, L. C. and Scapens, R. W., 2016. The role of identity and image in shaping
management accounting change. Accounting, Auditing & Accountability Journal.
Online
Zero Based Budgeting Meaning and Definition. 2020. [Online]. Available through: <
https://efinancemanagement.com/budgeting/zero-
based#Zero_Based_Budgeting_Advantages >