Management Accounting: Essential Requirements and Benefits

This document discusses the essential requirements and benefits of management accounting systems for efficient functioning. It also explores how management accounting reports support decision-making in organizations like Lets Grow Ltd. The document includes a cash budget for the coming six months ending in August 2020.

Management Accounting

Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
A) Explain the essential requirements and their benefits for management accounting
system to function efficiently......................................................................................................3
B) . Discuss how management accounting systems and its report help support an
organisation like Lets Grow Ltd in making decisions.................................................................5
TASK 2............................................................................................................................................7
C). Prepare a cash budget for the coming six months ending in August 2020............................7
D) Use of cash budgets and its application for preparing and forecasting the financial position
of an organisation like Letts Grow Ltd........................................................................................9
E) Discuss how Lets Grow Ltd can adapt its management accounting system to be deal with
financial problems.....................................................................................................................11
F) Critically evaluation of the financial position of Lets Grow Ltd based on the forecasted cash
budget prepared.........................................................................................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
MA is a wider concept which should be understood by all managers to strengthen the
organisation in which they work. This is a technique that helps internal stakeholders to determine
whether the organization is operating appropriately or not (Quilty, Cosentino and Bagby, 2018).
As with the support of this accountant they can make critical choices on the basis of internal
reports generated. This report’s main aim is to clarify the management accounting theory and its
implementation within the company. In this report, the company Lets Grow Ltd is selected to
better understand the importance of MA which is a manufacturing firm.
In this file, MA system with their essential requirement, MA reports and its importance is
discussed. In addition, costing techniques used to prepare income statement and determine net
profit. Report also covers; different MA planning tools are elaborated that use in budgetary
control and MAS importance in order resolve the finance problems.
LO 1
A) Explain the essential requirements and their benefits for management
accounting system to function efficiently.
Management accounting seems to be the combination of financial reports and documents
used to provide accurate and credible financial information for making profit. The manager of
the company must assess, collect and record the banking transactions by managing the financial
information and maintaining income (Singh and Verma, 2018).
Essential requirements of a good MAS
Reliable: All the system must be reliable so that information contain can be trusted in order to
make good results for increasing the company profitability.
Accurate: The system must be accurate as all the information must be reported as per the
accounting standard which eases the work of internal manager to make valuable use of the
collected information.
Timely: All the information should be gathered on regular basis within accounting report with
the support of different system so that not a single point of information gets missed out.
Relevant: This is main feature for every MA system as entire information must be correctly
related with the operation in order to reduce the chance of error and confusion within internal
reports.

MA System:
Inventory management system: This method is very important for all companies that
are trying to manage and properly track correct stock records. It is used mainly for the control of
the private sector facilities and goods and for the supply chain. Lets grow management uses this
method to classify products with the help of involving the chain of supply or market operations.
This was intended to offset the improved productivity from the production to the distribution,
inventory handling, processing and distribution (Weetman, 2019). This system's is necessity to
gather all the details about inventory and control and monitoring the level of stock with the aid of
technology in respective firm. This program benefits operating effectiveness in functional areas
which produces full results by reducing costs and maximizing sales and profits for Lets Grow
Ltd.
Price optimization system: This system is used as a quantitative analysis process that
clarified how a company should adopt the price strategy to optimize profitability. This approach
also aims to provide guidance in determining the tariffs that would be appropriate to both
industry and customers. As well as using this method Lets grow Ltd Increase and
develop appropriate rates that draw attention of consumers and improve productivity by trying to
set non-violent operating prices. This report involves maintaining an excellent business pricing
system which supports company to increase overall profit margin and maintain a decent price of
good that will be consequently selling throughout on the market. Moreover this program is also
use in Lets Grow ltd to evaluate the buying trends of clients and giving preference to price
ranges. In case if product costs are higher than consumers, they won't want to purchase goods.
Therefore, using this accounting method, it is possible for the sales department of the above-
mentioned organization to fix rates at a point where they can produce higher profits.
Cost accounting system: This is a technique of management accounting, that used
quantify reliable and correct costs from across all the operation within company. It includes the
process of recording, assessing, defining, summarizing and reporting needless costs to track. In
fact, something can be done to think about the real value of the various services and products.
This approach is used by manager of Lets Grow Ltd, to calculate the expense incurred
in growing manufactured product as well as to assess whether company is profitable or not in a
specific time period. By adopting the cost accounting approach business will cover the costs of
its activities and create a profitable organization. This system main obligation is to set cots for

each commodity in order to achieve market development and performance and to forecast
potential operations. Through implementing this framework, Lets Grow ltd could collect data on
uncompetitive trading activity and explore all the exact reason for inefficient activities. So
manager can make smart expenses over activities which are producing less return to company
and take decision to increase the overall expenses over business activities which are beneficial in
creating more wealth (Welsh, 2018).
Investment Appraisal system: This system is consider to be a main system which
provides a way to examine whether or not a project investment is acceptable, or not. There are
various techniques included with Investment appraisal system such as accounting rate of return,
payback period, discounted cashflow and investment risk and sensitivity analysis that support in
making exact evaluation of any project which is company planning to made. In context of Lest
Grow ltd, manager uses NPV and payback period in order to assess the investment within
different option available within market. Such as NPV help to define the net present value of
expenditure made on purchasing a machine for manufacturing goods in company. Similarly
Payback period define the total time take to recover the initial amount of investment. Net present
value (NPV) is used in Lest Grow ltd contrast between the current value of currency inflows for
a span of time and the current make financial transactions outflows. In capital budgeting and
financial planning NPV is being used to assess the feasibility of a proposed investment or
initiative.
Credit Control system: Credit management is the mechanism used by Lets grow to guarantee
credit is only provided to lenders who are legally obliged to repay it. Credit controllers regulate
lending by measuring and controlling risk, since these concerns are rarely definite.
Sales control system: Sales controls system is mainly used by respective firm to essentially
processes that a manager pursues to ensure that their staffs does the right tasks at the proper
moment. Those control systems improve the sales associates' efficiency and health. There have
been two types of systems on sales: behavior-based and result-based
B) . Discuss how management accounting systems and its report help
support an organisation like Lets Grow Ltd in making decisions
MA reports are beneficial for internally and externally democratic accountability that
includes financial planning information, processes and strategic take-up records to fulfil short-

and long-term objectives. The different MA reports are useful for company in several many
ways such as; aims to plan, coordinate, and monitor company budgets. Like Lets grow the
director of industry performs cash management documents with the help of financial details and
cash management. Some of the important reports prepared by the manager of Lets Grow Ltd are
discussed underneath:
Debtors’ analysis Report: It applies primarily to the collection of customer data, which in
the future will cover and procure goods on debts (Grabner, Posch and Wabnegg, 2018).
Eventually, the whole report is commonly used by corporate finance departments because they
can generate important information according to how many debtors do not pay debt and after
deadline by using this report. In Lets grow Ltd this report used by the management to maintain
accurate amount details leading to the customer being received at a delivery date. This helps the
individual to determine the real performance which will be reached in the future.
Break Even Analysis Report: Break-even accounting includes measuring and analysing an
entity's margin of protection based on the income obtained and related costs. Evaluating different
pricing ranges compared to various rates of production a business provides break-even data to
evaluate what amount of revenue is required to meet the overall operating expenses of the firm.
A demand-side review will give a seller considerable insight about selling capability. In context
of Lets group Ltd Breakeven Analysis reports indicates whether a segment's net income equals
the cost of delivering the selling campaign to the segment. An analysis of the breakeven analytics
study reveals how a group worked compared to its competitors in marketing activities. The
break-even point is determined by calculating the gross fixed manufacturing costs by the price of
a commodity per single unit, minus the variable production costs. Fixed expenses are the ones
that remain the same no matter however many items are sold (Nartey, 2018).
Master Budget: This is a critical report used to determine the business success and generate
revenue for small, large and medium companies. Thus, each company sets a master budget report
which is taken into consideration and help Company to control activity in respective manner that
results to grow profit. The planning for master budget is based on previous experience and
knowledge allowing more revenue to be generated within recent year. Lets grow Ltd create
budget reports that enable managers to help workers and forecast sales and expenses accurately.
This is indeed related to the fact that companies distribute personnel to all branches in
accordance with their criteria, so where the operations should be performed. Lets grow Ltd also

necessitates this structure to ensure all scheduled activities are managed within the budget
already agreed upon. This is beneficial to the organisation because ample funding will be
provided to the divisions to perform all their functions. Additionally, this study is valuable for
firms to figure out difference in real and expected costs and also sales. Because of this managers
take appropriate steps for the accounting cycle of next years (Suljović and Meta, 2017).
Credit control report: In relation to the this report, Sage Accounts includes so many credit
control reports, declarations, as well as debt foraging messages to assist lest grow manager
to protect the monthly, quarterly or annually cash flow but also smash debt obligations
easily. So, manager got the equipment which is needed to control company's overall credit.
Inventory control report: The inventory management report deals with essential details of the
total raw resources accessible in warehouses, transit products as well as fully prepared for sale
final products. Managers of Lets grow are therefore bound to maintain an appropriate quantity of
goods, since they're the corporation's main source of income.
Price optimization report: This report is usually created by manager of Lest grow to record the
price of goods and services at which sales was maximum and most number of customer prefer to
buy at the specific cost. Thus it enables them to produce and offer goods and decent price for
long term financial growth.
M1. Evaluation of Benefits of various management accounting systems.
System Benefits
Cost accounting system Supports supervisors of lets grow in a manner that allows them
to interrogate the company's largest commercial products.
Inventory management system This help organizational system to boosts Lets grow efficiency
and profitability by sustaining enough stock.
Sales control system This provides comprehensive charging information such as
labour, materials and other running costs that are elaborated
within the businesses in different job opportunities.
Price optimisation system This method provides guidance in assessing suitable tariffs
which would suit industry and customers.
Credit Control system: Credit controllers govern lending by risk assessment and

monitoring, although such issues are rarely definitive in lest
grow.
Investment Appraisal system It includes techniques of Investment appraisal system such as
ARR, payback period, discount rate cashflow, financial risk and
risk assessment which makes manager of respective company
to keep accurate assessment of any project which is planned to
be made by the company.
LO 2
C). Prepare a cash budget for the coming six months ending in August 2020.
Particular March April May June July August
Balance at bank 20000 20000 49000 47000 13000 -9000
(A) Receipts
Collection from credit sales 30000 156000 168000 124000 144000 162000
Amount received from
customers 96000
Total (A) 146000 176000 217000 171000 157000 153000
(B) Payments
Credit purchase 50000 70000 80000 90000 100000
Loan 20000
Wages 30000 30000 30000 30000 30000 30000
Rent 12000 12000

Depreciation on fixed assets 2000 2000 2000 2000 2000 2000
Variable overhead 10000 15000 18000 12000 14000 16000
Fixed overhead 30000 30000 30000 30000 30000 30000
Suppliers for purchase 50000
Total (b) 134000 127000 170000 166000 166000 178000
Total (a) - (b) 12000 49000 47000 5000 -9000 -25000
Working Note:
Collection from sales:
March- 150000*20%
= 30000
April- 180000*20% + 150000*80%
= 36000+120000
= 156000
May- 120000*20%+180000*80%
= 24000+144000
= 168000
June- 140000*20% + 120000*80%
= 28000+96000
= 124000
July- 160000*20%+140000*80%
= 144000
August- 170000*20%+160000*80%

= 162000
Rent paid:
Total amount- 48000 per annum
Per quarter- 48000/4
= 12000
Depreciation:
Total- 24000 per annum
Per month- 24000/12
= 2000
M2. Apply a range of management accounting techniques
Cost-volume profit analysis: Cost volume profit assessment is indeed a method to cost
financial reporting that makes it look only at impact on net income that various price rates and
volumes have in particular time
Activity-based costing: ABC is an accounting method for produced products and services
that relates overheads and admin fees and manufactured products and adds administrative costs
to products less critically than traditional cost methods.
D) Use of cash budgets and its application for preparing and forecasting the
financial position of an organisation like Letts Grow Ltd.
The mechanism that is being used by organisation for preparation of projected budget
along with evaluation of real performance of budget for assessing deviation is referred to as
budgetary control. When making a comparison between figures that are being calculated then
firm can identify variations which prevails within figures which makes them to take adequate
measures without any delay (Otley, 2016). The process is being ensured by senior management
of Lets Grow Ltd. this control is critical as excess expenditure creates a negative influence on
corporate income. Budget control is being utilised like organisational mechanism for
management of expenditures such as organisation of different departments, budgeting, evaluation
of output, and evaluation of budget and defining obligations along with budgeted results for
attainment of results which are efficient or competitive. This acts as corrective action with

respect to financial aspects and on this basis variations within income along with cost can be
computed effectively.
The primary rationale of Lets Grow Ltd. to utilise budgetary control is that they have
relevant mechanism that have key role within success of organisation. The proficient budgetary
control system tends to coordinate within multiple operations thereby ensuring that firm operates
in a consistent manner (Cooper, Ezzamel and Qu, 2017). It guarantees operating capital along
with other services which can be accessed by organisation in adequate way. It is useful for
organisation as it takes into consideration variation which prevails among cost as well as actual
cost. With respect to this, planning tools are specified below:
Cash budget: It is referred to as financial plan which is specified for expenditure of client
with respect to preceding year. It is liable for listing expenses that are involved within processes
and operations that are carried out. If this budget is not used by Lets Grow Ltd. then it will be
difficult for them to compute actual cost.
Advantages: Cost budgeting is liable to control incoming expenditures of firm along with
this; it facilitates transition within profitable channels associated with capital. It will enable
management of Lets Grow Ltd. to analyse actual cost levels for particular time period.
Disadvantages: This is time when process determine expense estimate as method needs
sufficient time. Management often anticipates having variation in context of spending but
standards are not attained by this.
Zero based budgeting: Every new period have to be justified through spending within the
budgeting process. This begins from base zero and amount or cost is being analysed.
Management of Lets Grow Ltd. demands that increase within investment have to be explained
within budgeting approach before actual budget is being incorporated. This budget aims at
eradication of additional expenses (Nitzl, 2016).
Advantages: Zero-based budgeting acts as an effective approach for encouraging business
to handle their money in an efficient way as it is not dependent on previous budget figures. This
will aid Lets Grow Ltd. to have transparency along with accuracy in their financial statements.
Disadvantages: This takes time for moving regularly towards incremental and even easy
budgeting strategy. This will lead Lets Grow Ltd. to emphasise only on cost rather than other
aspects as this takes lot of time. Each expense has to be explained and administered which makes
it difficult for small firms to opt for this.

Capital budgeting: This mechanism s being utilized by entity for classifying their
transaction as this needs to be approved as well as decline working capital that is being proposed.
This is liable for offering reasonable framework to analyze realistic understanding associated
with enhancing probable fixed asset expenditure (Hall, 2016). It will assist Lets Grow Ltd. for
evaluation of investments.
Advantages: Capital budgeting aids Lets Grow Ltd. within estimation of high probable
returns on investment options through which they can have high return through assistance of this
budget. This is probable as this aid within having analysis of different techniques. This aids
managers within having rational investment choices by taking into consideration all the
alternatives within account.
Disadvantages: The policies within budgeting of capital are usually long term and
inherently irreversible. When capital investment judgments are wrong, than it will have an effect
on long term durability or sustainability within organisation. Along with this, Lets Grow Ltd. can
have various challenges when various assumptions are being made on evaluation of project.
M3 Importance of planning tools for budgeting and forecasting process
The planning tool mentioned above allows management team to include sufficient
knowledge of the organization’s expenditure over different operating processes. As a direct
consequence, it further supports the development of effective expenditures for the time frame as
employees can better distribute money to the operations that they believe will lead to higher
performance in the future.
E) Discuss how Lets Grow Ltd can adapt its management accounting system to
be deal with financial problems.
Firms face various financial challenges while rendering their services within competitive
marketing environment. Some problems that are being faced by Lets Grow Ltd are specified
below: Inventory management: As market grows rapidly, firm faces various difficulties to cope
up with those changes. When competition enhances then customers gets stringent as well
as anticipates enhancing facilities. This furnishes firm with an opportunity for handling
their inventory in adequate manner.

Lack of liquidity: Unexpected withdrawals, over lending, poor asset quality, low profits,
drop in assets, investments, and many other factors leads to instability within issues that are
being faced by firm (Makrygiannakis and Jack, 2016).
As a response MA methods have been utilised as a response to financial problems are
shown below: Key performance indicator: It is a type of method that is associated with analysis of
financial as well as non-financial perspectives of organisation. Within this financial
element, revenues profitability, etc are taken into consideration. With respect to non-
financial entities, this involves relation among managers and employees, stress
management etc. In context to this, Lets Grow Ltd, they need to opt for this method for
solving financial problems.
 Financial governance: This is form of accounting method that is being associated with
making organised records for financial data which is liable for issuing regards to firm to
solve them (Hiebl, 2018). It is often utilised for monitoring system through which
financial problems can be addressed as data is being arranged for improvising overall
outcome from financial aspects.
Comparison of organisations depending on management accounting system:
Basis Lets Grow Ltd Harvey Water Softeners
Issue face by
company
There is issue with adequate
management of stock of organisation.
Irrespective of inadequate interaction
along with faulty decision making,
business management face problems
to keep products.
The problem faced by them is
associated with liquidity
shortage. This is due to
insufficient funding for work to
be completed successfully as
well as safely with respect to
their operations and activities.
Management
accounting System
The firm can opt for stock
management method as it is enough
to deal with problems related with
Stock issues This system leads within
attainment of profitability as well as
efficiency of events and processes. It
With respect to this, they can opt
for managing issues associated
with lack of liquidity. This will
aid them within retaining
profitability levels by preserving
profits, timing of sales, short-

leads to minimised manufacturing
prices along with raised income and
revenue which automates
organisational functions. Along with
these needs of customers can also be
accomplished in an adequate manner.
term acquisition and cash flows.
This aids firm within having
control of cash flows of business
as well as allow firm to sustain
relevant cash rates which is
liable for sustaining relevant
cash rates which are liable for
ensuring smooth implementation
of operations.
Technique The execution of key performance
indicators is valuable as it assist
business manager within monitoring
inventories along with enhancing
efficiency (Rikhardsson and
Yigitbasioglu, 2018).
Financial governance is one of
the most effective strategies for
gathering, managing, tracking as
well as regulating financial
tracks of organisation from
where all the associated activities
and operations of firm can be
handled in an appropriate
manner. This will aid them to
ensure that there is adequate
liquidity within business is being
preserved.
F) Critically evaluation of the financial position of Lets Grow Ltd based on the
forecasted cash budget prepared.
From the above cash budget it has been determined that company is going to include
various types of new expenses within the coming year and revenue generation will going to
increasing in the future year. Only in last two month the cash expenses can be greater that cash
revenue thus manager are needed to plan accordingly and focus to reduce these additional
expenses over rent, salary and other elements.

M4 Respond to financial problems, MA lead to sustainable development
Lets grow managers use benchmarking for stock mismanagement, help encourage workers
to increase sales and profitability, obtain more incentives and implement monetary regulation
regulations to function effectively, and using the KPI system for cash flow problems, where they
can gather money throughout a given period of period and resolve the same.
CONCLUSION
From above it can be concluded that, firms makes use of management accounting for
monitoring gains attained by them with a attempt for enhancing efficiency. Management system
as well as systems is being utilized by organizations for assessment of exact situations which
prevails within the business. There are companies which are employed for making sure that
various costs are adequately identified by making use of cost accounting methods like absorption
produce loses or gains, marginal methods. Along with this, there are certain predicting methods
which have been used for forecasting as well as assessing expenses related with organisation
under the term organisational control. Firms make use of different strategies such as KPI,
benchmarking along with financial governance for identification as well as addressing financial
problems.

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