Management Accounting: Systems, Reports, and Budgetary Control

This document provides an overview of management accounting (MA) systems, reports, and budgetary control. It explains the benefits of MA systems and discusses different types of MA reports, such as inventory control reports, debtors analysis reports, break-even analysis reports, and master budget reports. The document also includes a cash budget for the next 6 months and explores planning tools for ensuring budgetary control. Suitable for students studying management accounting or anyone interested in understanding the role of MA in financial decision-making.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
LO1..................................................................................................................................................3
Management accounting (MA) system and it benefits...............................................................3
Management accounting (MA) reports and its usefulness..........................................................6
LO2..................................................................................................................................................8
Cash budget for the next 6 months ending in August 2020........................................................8
LO3..................................................................................................................................................8
Planning tools for ensuring budgetary control............................................................................8
LO 4...............................................................................................................................................11
Compare the ways organization used to adopt MA system......................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting (MA) is mainly the process through which the business
organization identifies, measures and analyses the important accounting information for
effective and improved decision making. It is used by the internal team of management
for the purpose of taking crucial business decisions such as business expansion, for
which requires a complete analysis for before taking any decision as it affects the future
prospects of the business. This reports presents about the fundamental aspects of
management accounting, its systems and techniques which are useful for business
organizations. It also covers the various types of tools which can be used by the
business entity for facing various financial problems that may come across. Also, the
cash budget for the Lets Grow Ltd which will be helpful in determining it current cash
position.
LO1
Management accounting (MA) system and it benefits
MA is also known as managerial accounting which is the process used in
determining and analysing the costs and the business operation for the purpose of
preparing the relevant reports which are mainly used for the internal financial reporting
(Singhvi and BODHANWALA, 2018) . It also provides help to the management taking
effective decision with respect to strategic planning and implementation. In simple
terms, it is the process of transformation data into useful information to be used by
internal management team.
The management accounting system are the system which is deployed in an
organization which provides assistance in meeting the varied business needs. An
effective MA system will meet the needs of the business organization and it includes
budgeting, cost analysis, trend analysis etc.
Essential requirements of good MA system
Following are the few essential requirements of a good MA system.
Reliable: The data provided under MA system should be stable and consistent
with the data gathering process. The progress towards the performance should reveal
the actual changes instead of variation of the data gathering process and methods. The

data should be easily made available either through manually, automated or through
others systems and records.
Accurate: The data gathered under the MA system should be accurate should
be able to serve the intended use and should be gathered only once even if it is having
multiple usage. All the relevant data should be captured at the point of activity.
Timely: It is very essential to record all the relevant data in a timely manager and
as quickly as possible and should make available as and when it is required within the
required time frame (Wisna, 2018). The data should provide quickly and frequently for
meeting the business requirements for influencing the organizations decisions.
Relevant: The another crucial aspect to be considered while implementing the
MA system is that it should be relevant to the changing needs of the business. The data
which is being available should meet the purpose and requirement for which it is
gathered otherwise it will be of no use. A periodic review is required for the changing
needs.
Types of management accounting system
There are various forms of MA systems which is being utilized for the meeting
the various needs of the business. This need varies from one organization to another.
The various forms of MA system are stated below.
Job Costing system
It is mainly used for assigning and accumulating the costs in respect to the
production of the single unit of the product. It is mostly useful when the various items
are being produced which different from one another and each having a significant cost
(Weinman Jr, AT&T Intellectual Property II LP, 2019). This system requires a separate
job cost record of each of its items. It provides complete details about the direct material
and labour which is had been used in real and the amount assigned as the production
overheads.
Benefits:
 It provides complete detail about the costs which is being used through the
process of production.

 This system is also used in determining and measuring the profitability
associated with each job undertaken and also help in taking future decisions with
respect to whether to take the job next time or not. It also helps in avoiding the situation of duplication of work because it can be
used in estimating the cost of the similar job. The price of the job is dependent
upon the price of the previous job which is taken as a base.
Price Optimization system
It is the another form of MA system which is being used by the business
organization with the purpose of determining the price of the product. It is used for
finding out the sweet spot or in other words, the maximum price at which the customers
are willing to pay (Harsha, Subramanian and Ettl, 2019). The organizations up and
down their supply chain with the core objective of optimizing the price of their products
which can be useful in optimizing the price of the product which will help in selling the
product as quickly as possible at the right price for making a good amount of profit.
Benefits:
 Price optimization assists the companies in focussing on the key areas like sales,
conversion rate and so forth. It helps in growth and expansion of the business.
 This system has completely reduced the manual work and has also reduced the
possibility of any human errors. Also, the prediction which are done with it are
more precise and has huge influence over the business. It helps in regularizing the price of the product as per the changing market trends
and the willingness of the customers to pay.
Inventory Management System
It is the tool which is being used by the business organization with the objective
of tracking the movement of goods from one process to another across the entire supply
chain. It helps in optimizing the entire system from the time of placing the order and the
delivery of the same to the end customers (Henderson and et.al, 2018). It monitors the
complete journey of the material transforming into a product. It helps in ensuring that the
right amount of inventory is available at the right time.
Benefits:

 This system helps in reducing the inaccuracies as most of the task is automated
which leads to reduction the human error.
 It provides relevant reports which can be used by the organization in taking more
relevant and intelligent business decisions.
 It helps in exercising control over the stock by ensuring that the company has not
over stocked the products or in the situation of out of stock. This results into cost
saving with respect to unnecessary management of overstocked inventory and
wastage and spoilage.
Management accounting (MA) reports and its usefulness
Management Accounting report
The MA reports generated by the various MA system helps Lets Grow Ltd in
monitoring and evaluating the performance of the business which can be prepared
frequently for a specific period (Ma and Gong, 2019). It is prepared as per the
requirement of the business each of it serving the various business needs. The various
types of MA reports are stated below which can be used by Lets Grow Ltd.
Inventory control report
This report is useful in determining the amount of inventory the company is
currently having in comparison to the inventory it requires for carrying its business
activities (Handojo and et.al, 2020). It provides details about raw material, work in
progress and the finished goods.
Importance
This report is useful in determining the level of inventory the company is having
based on which the reorder time of it is estimated. It used for ensuring that the business
never goes out of stock or is over stocked. Also, it is useful in mitigating the
unnecessary costs associated with managing the additional inventory.
Debtors analysis report
This report provides the complete details about the amount to be paid by the
customers for the goods purchased on credit (Date and Acts, 2016). It provides break
up of all the details with the due balance and the due date of each. It is also useful in
determining any bad debts in time.
Importance

Preparing this report will help the organization in carrying out the effective
planning process with respect to collecting the due amount on time. It will be useful in
analysing the present and the future cash flow position of the business and also based
on it the relevant decisions related to credit policy can be taken.
Break even analysis report
It is a very important report which is being prepared by the businesses with the
objective of knowing the point at which the business will be in no profit no loss situation
(Rizki and Sukoco, 2019). It helps in determining the amount of sales at which the
company would be able to achieve maximum profits. Break even analysis is also useful
in determining the price of the product in order to achieve the desired profits.
Importance
This report is basically useful for the business organization which are looking for
expansing their business or introducing the new product in the market and its impact
over the profits of the organization. More importantly, this report is useful in establishing
the relationship with change in profits with respect to change in price of the product in
the long run. A bifurcation of costs is done into fixed and the variable cost which helps in
determining the impact of each these costs on the profits.
Master budget report
The master budget report is the compilation of all the lower budgets which states
about the functional areas of the organization and it also includes the forecasted
financial statements, cash budget and a complete financial plan (Bužinskienė, 2019).
This report is being used by the management for directing the business activities.
Importance
This budget provides an assistance to the organization taking relevant business
decisions based on the information gathered on various aspects and departments of the
organization. It assists in meeting the long and short term outcome of the business. It
also helps in meeting the financial requirements of the business in order to enhance its
position.
The MA system and reporting is very important for the business organization
since the MA report provides information on different business requirements whereas

the MA system is mainly used to provide the qualitative information to the business. The
integration of the two results in effective managerial decision making process.
LO2
Cash budget for the next 6 months ending in August 2020
Cash budget
Particulars March April May June July August
Sales (in the same month) 30000 36000 24000 28000 32000 34000
Sales (Received in the
following month) 96000 120000 144000 96000 112000 128000
Total sales 126000 156000 168000 124000 144000 162000
Purchases 50000 50000 70000 80000 90000 100000
Wages 30000 30000 30000 30000 30000 30000
Rent 12000 12000
Depreciation 2000 2000 2000 2000 2000 2000
Variable overheads 10000 15000 18000 12000 14000 16000
Fixed overheads 30000 30000 30000 30000 30000 30000
Total expenses 134000 127000 150000 166000 166000 178000
Cash surplus/Deficit -8000 29000 18000 -42000 -22000 -16000
Opening cash balance 20000 12000 41000 59000 17000 -5000
Closing cash balance 12000 41000 59000 17000 -5000 -21000
Analysis and interpretation:
It can be summed up from the above that the Lets Grow Ltd is required to look
after its cash position because in the last two months the closing balance is negative
which might be because of increase in the expenses. The revenue of the company has
shown a fluctuating trend and the purchases of the company has increased over the
period which is a point of concern. Therefore, the company is required to take remedial
steps to handle it effectively.

LO3
Planning tools for ensuring budgetary control
The various tools that can be used by Lets Grow Ltd for the purpose of
implementing the budgetary control are described below.
Cash budget
The cash budget is prepared with the aim of determining and evaluating the
various sources of funds along with the application of the same (DeFranco and
Schmidgall, 2017). It used in identifying and analysing the amount of cash the business
is currently having and the future prospects in respect to determining whether the
business is having enough cash to meet its daily cash requirements. Based on this
budget other budgets are prepared as everything is dependent upon cash.
Advantages:
 The cash budget will help Lets Grow Ltd in putting focus in the important areas
with respect to cost incurred so that corrective actions can be taken in order to
manage it effectively and avoid the unnecessary expenditure.
 It helps in determining the deficit in the budget so that business can make
strategies according to it for increasing the cash balance.
 The cash budget depicts the actual liquidity position of the business in respect to
the cash availability. It can be easily understood by anyone has an interest in the budget.
Disadvantages:
 The cash budget puts the restriction over the spending of the organization and
this may lead to distortion as changes can be made as per the requirement.
 It cannot be considered equivalent to the profits of the organization.
 It also takes into account the many unreliable sources through which either cash
inflow and cash outflow, for instance, sales of fixed assets, amount of security
deposit received, legal expenses etc. which are not recurring in nature and this
leads to inaccurate budget. There are chances of altering the cash budget by making huge payment in the
year ending which could have been made earlier causes inaccurate outcome.
Capital budget

The capital budget is the statement which provides information about the
estimated capital receipts and expenditures of the business entity. It provides details
about the organizations plan for acquiring or making investment in the capital assets for
the long term perspective (Vlachý, 2020). On the other hand, receipt refers to the
amount which has been received from the public or in the form of borrowings from the
government.
Advantages:
 It is completely based on the long term and future opportunities of the business.
 The capital budget provides the complete and the exact figures and therefore,
the capital expenditure is required to be incurred within the set limit. Each item is entered into budget after carrying out the proper evaluation and
analysis of it which helps in meeting accuracy.
Disadvantages:
 This budget is static nature, therefore, changes cannot be made in between.
 Even a minor error in depicting the capital expenditure might cause a huge loss
for the company as it mainly involves huge amount.
 It cannot be used for the short term business requirements.
Flexible budget
This budget is also known as variable budget as it provides complete financial
plan in respect to the revenue and expenditure of the business which is based upon the
actual business outcomes (Maher, Fakhar and Karimi, 2018). Taking actual production,
it determines and estimates how the revenue and expenditure will change when there is
a change in the level of output, because of this reason it called variable budget.
Advantages:
 It can be prepared for multiple level of activity unlike static budget which prepares
for only one level only.
 This can be used in effectively comparing the actual output with the budgeted
output and cost with the set standards. This tool is useful in exercising cost control as it reacts to the changing situations.
Disadvantages:

 It might show variation in the result and also does not provide details about the
causes of such variance.
 There are situations when it shows unfavourable budget which has negative
influence over the investors and the consumers.
 This budget requires highly skilled personnel which are lacking in the industry
because of which it is difficult for the companies in utilizing it.
LO 4
Compare the ways organization used to adopt MA system
Financial problems
Financial problem refers to inadequate cash flows in the business, where
expenses are higher than the income of company. Business is not having enough
resources to make payments to the suppliers and creditors. It affects the growth of
business and its working. Lack of resources, delay in collections from the debtors and
such other issues are the financial problems that organisations face. Company runs in a
dynamic environment and is required to face the challenges effectively for achieving
growth and success. Companies use different tools like key performance indicators,
benchmarking and corporate governance for resolving these financial issues.
Balance scorecard – It is described as framework for implementing and
managing the strategy. The vision is linked the strategic objectives, targets, measures
and the initiatives. Balance score card are used for measuring the financial performance
and goals related with all parts in organisation. Lets grow ltd uses balance score card
for reviewing its performance in the specific period. The issue of inadequate cash flows
faced by the company is used for making effective utilisation of resources (Syahdan,
Munawaroh and Akbar, 2018). Lets Grow made budgets for the specific departments
and activities of the organisation to keep them under control. The extent to which
company was able to achieve the targets was measured using the balance score cards
where the scores were given to different department. It helped the company to identify
the areas with lowest scores and made the management to focus over department to
reduce the variances.
Key Performance Indicators – It refers to the measurable value demonstrating
how effectively the company is achieving its business objectives. The KPI's are used at

different levels by organization for evaluating success in reaching targets. Lets Grow set
targets to be achieved in the specific period related with the sales, production and other
such like targets for achieving the success. Standards are set by the organization
related to the different targets that are to be achieved in specific time frame. At the end
of the period company identifies the distance from the set standards. Measures are
taken by the organization for reducing the areas that are affecting the organisations to
reach their objectives. It helps Lets grew in resolving the financial issues faced related
to different departments.
Corporate Governance – It refers to different rules, laws or processes through
which the business are regulated, operated or controlled. Term also encompasses
internal as well as external factors which are affecting interest of the stakeholders
including customers, suppliers, shareholders and management. All the strategies and
improvement steps are required to be monitored and controlled by organisation
(Yermack, 2017). Corporate governance involves establishing strong internal controls in
various processes where it could identify the wastage and other inefficiencies faced by
the departments. Lets grow has established new controls and processes for making the
management to identify the issues at initial stage so that adequate steps could be taken
immediately for reducing the errors and issues.
Benchmarking — It is the performance measuring tool which is used for
evaluating the performance of the business organization against the competitor within
the same industry. The competitor considered is to be best in the industry. This helps in
identifying the strength, weaknesses and opportunities of the business in comparison to
the competitors (Beyer, Löwe and Wendler, 2019). The comparison is based on the
processes, technology which is being used and what difference it is creating in the
organization. This assist the business entity in understanding its cost structure along
with the internal processes. It encourages team work and establishing proper
coordination. Thus, it helps in evaluating the weakness of the organization so the
remedial actions can be taken to reduce it.
Different organization adopt different types of MA system with the objective to
overcome the various financial problems it faces. There is a comparative analysis of the
two organization is given below.

Let's Grow limited Tesco
This organization uses job costing MA
system for achieving its business
requirements which also helps in facing
any of the business challenges that might
they might come across while operating
the business operation. It helps the Let's
Grow limited in determining the cost
incurred under the different jobs a product
has undergone. It is also useful in
identifying attached to each product and
job so that relevant decisions can be taken
whether to performed or take this task next
time or not.
Tesco is a retail organization and based
on its need it has implemented inventory
management system. This system is very
useful for it as it effectively monitors and
manages the inventory of the organization.
It maintains proper record of the items
from the time it is ordered and till is finally
delivered to the customers. It is completely
automated which makes it accurate and
prone to fewer mistakes and errors.
CONCLUSION
It can be summarized from the above that the various types of MA system such
as job costing, price optimization and so forth are very useful in meeting the different
business needs. There is a strong relation between the management accounting system
and reports and integration which results into number of benefits for the organization.
There are certain essential factors such as reliability, accuracy, timeliness etc. Thus,
implementation an MA system requires to fulfil these needs. The MA reports also
provides a meaningful information to the business which works on effectively managing
it. There are different tools which assists in exercising budgetary control such as cash
budget, flexible budget and capital budget etc. At last, a comparison has been drawn
between two organization with respect to the MA system being followed in there.
Therefore, it can be said that management account is very important and useful.

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