Advantages of Managerial Accounting

The assignment discusses the importance of managerial accounting in Big Yellow, a storage industry company. It details how effective management accounting practices have contributed to the company's success by systematically managing the accounting department and ensuring proper coordination with other departments. The report also references various studies and research papers that emphasize the significance of managerial accounting in achieving organizational goals and performance.

MANAGEMENT ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
LO1..................................................................................................................................................1
P1 Meaning of management accounting and essential requirements of different management
accounting systems......................................................................................................................1
P2 Different methods used for management accounting reporting in Big Yellow.....................4
LO 2 ................................................................................................................................................6
P 3 cost techniques and income statement..................................................................................6
LO 3.................................................................................................................................................7
P 4 advantage and disadvantage of budgetary planning tools.....................................................7
LO 4...............................................................................................................................................11
P5 Comparing how the Big Yellow adapting accounting management in respond to financial
problems....................................................................................................................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting means assembling all the accounting information to put up the
financial reports of the company for making better decisions and formulate strategies and
policies accordingly. This management is concerned with conversion of quantitate data like
estimated costs into meaningful information to be used by management of the company. This
project report will cover Big Yellow, a self storage company which provides space like rooms,
containers, lockers to the people on rent for short period. The taken company is a public limited
listed on LSE and FTSE 250 Index which was founded in 1998. It is headquartered in Bagshot,
Surrey, UK. The company is one of the largest self storage firm in UK and is currently having 92
stores in the country. Big Yellow enjoys the tremendous brand image in this industry(Abdel-
Maksoud, Cheffi and Ghoudi, 2016).
The assignment will lay its emphasis on different techniques of management accounting
systems and different methods of reporting. It will also include different techniques of
calculating the costs' analysis. The reports will show the advantages and disadvantages of
planning tools in budgetary control and how Big Yellow will adapt the management accounting
systems to cope up with the different financial problems.
LO1
P1 Meaning of management accounting and essential requirements of different management
accounting systems
Big Yellow, a self storage firm which provides spaces, storing places, rooms to the tenants for
business and personal purposes. It has ninety-seven storage places in London and UK. The
company employs various accounting systems such as cost accounting system, inventory
management system etc., for efficient management accounting in the firm.
Management accounting is concerned with providing all the useful information in the
form of financial reports by converting the cost related data into organised information for
assisting the management of Big Yellow in the decision making process. It is also known as
managerial accounting. Managerial accounting helps the managers of Big Yellow to exercise all
the management functions which are planning, organising, monitoring and controlling. The
assistant management accountant of the company often faces issues in managerial accounting
such as forecasting, Inventory valuation, capital budgeting(Szychta and Dobroszek, 2016.).
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Management accounting system requires various components for being effective and
efficient in the organisation which are given below:
Inventory Management system: Inventory management is an essential requirement in Big
Yellow's accounting system. Inventory Management is related to managing all the raw materials,
work in progress and finished goods, stores and spares of the organisation. It monitors and
controls the flow of goods of the organisation from company's storage place to production area
and lastly to the stage of sale.
There are different inventory control methods used for the management of the inventory in the
company which are given below:
 Perpetual control inventory system: in which the inventory is checked on daily basis.
 Periodic inventory control system : in which the inventory level is examine after periodic
intervals like 1 week, 1 month.
 Barcode inventory system: in this the inventory items are scanned through bar code
scanner.
 Radio frequency identification inventory system : in this the inventory is tracked through
radio frequency waves and a reading machine.
This management is necessary in Big Yellow because of the following benefits :
 It ensures the continuous of flow of goods to the production department by analysing the
department's daily requirements of raw materials and ordering the same at the appropriate
time.
 It helps in eliminating unnecessary cost of handling stores and spares of the company by
efficiently managing them.
 It keeps the inventory in balance by determining the exact need of the unit and how much
has to be ordered and at what time which results in the adequate inventory at all times but
no excess inventory which locks the fund(Fourie and et.al, 2015).
 Inventory management helps in faster removal of the products from the warehouse by
critically examining the selling turnover in a year and accordingly taking decisions.
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 Precise planning can be done through efficient inventory management by preparing itself
for the seasonal requirements of the business and making sure the current demand can be
served on hand.
 Retaining customers is one the benefits of inventory management as it helps in serving
the customers efficiently by providing them what they need at any given point of time.
Cost accounting system :
It is the system which focuses on estimating the costs of the products and services of the
organisation which is used for the different purposes of the management of the firm such as
preparation of the financial reports, cost reduction planning, inventory valuation and forecasting
of the cost in severe conditions of the business environment. There are different types of cost
accounting system like job costing, process costing, traditional historical costing. This is an
important requirement for management accounting because:
 Helps in comparison and analysis of the Big Yellow's efficiency in recent year as
compared to previous trends of the firm by detecting the waste materials cost increasing
the operational cost of the company, or purchasing the inventory in excess of the needed
amount so that the corrective actions can be taken in order to improve the
efficiency(Thomas, 2016).
 Cost accounting figures out the costs that are spent on producing the items per unit by
proper allocation of the costs under various heads such as direct costs or indirect costs
and thus helps in setting the price of the unit produced with desired level of profits
included in it.
 Provides vital costing information to the internal management of the firm for formulating
the better policies and strategies based on facts and figures.
Job costing system: This system allocates the cost of producing one item/ unit/products to that
particular product or batch. This is useful for the firms who are engaged in manufacturing unique
products which are different from each other. The benefits of the job costing system are:
 It helps in allocating the jobs on individual basis and individual item profitability can be
calculated which assist the decision of whether the particular product should be produced
in the future.
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 Job costing management system assist the cost manager to keep an eye on people
engaged on particular job in order to control the cost at each stage of completion,
efficiency at the stage of production.
 This system is accurate in its functioning as it allocates the particular job towards relevant
accounts.
Price optimization system: This system in Big Yellow focuses on review the responsiveness of
the customers towards the differential prices when are sold through distributing channels. It is
applied for calculating the price for the products and services that best meets the customers needs
and demands and simultaneously fulfils organisational' objective of profit maximization. The
following benefits of the price optimization are:
 It helps in putting up of such a price that meets the customers' criterion with the ability of
earning desired profits(Modell, 2014.).
 It analysis the reaction of the customers towards the prices of the products in the market
and accordingly prepares it reports for assisting the management in optimally fixing the
prices of the products and services.
P2 Different methods used for management accounting reporting in Big Yellow
Budget reports: Budget reports are prepared for planing the expenditure that is to be incurred in
the Big Yellow. These are made considering previous years figures and facts for formulating the
estimated costs for future. Budgets are the boundaries within which the operations of the firm
have to be conduct. Budgets becomes the base for the future operations and budget reports are
prepared by each of the departments of Big Yellow which are then sent to the accounting
department where it compiles all the budgets, make changes according to the need and make a
master budget for the company. These reports consist of short term budget plans usually
prepared in the beginning of the year according to which the expenses are done and sufficient
funds are managed for each expense in advance and comparison is done with estimated figure
and actual performance(Pavlatos, 2015.).
These reports are important in management accounting system because these provide
basis on which the actual performances are compared with standards set in budget plan. Different
departmental managers in the Big Yellow are given the approved budgets and they accordingly
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work within the budgetary boundaries. The budget reports in the accounting management help
the assistant of management accounting to exercise the controlling function as the deviation is
found out by measuring the actual performances of the department and comparing it with budget
plans. Corrective actions are taken by the managers of Big Yellow to remove the differences for
implementing the budgetary plans effectively and achieving the organisation targets.
Account receivable reports:Account receivables are the amount due on the account of
company's debtor. This affects the inflow of cash in the organisation as more credit time given to
customers will increase the demand of the management of working capital requiring for carrying
out the day to day activities of the business. Various standards are set in the report regarding time
a customer will need to pay its debts like one or three month credit allowed. This report will
assist the management accounting assistant manager of Big Yellow to identify whether the
estimated period given to debtors are sufficient and to find out the reasons in company's
collection process. It helps in decision making process of the company like people not paying the
money due in the given time will tend the management to formulate strict policies regarding the
sales or may be to sell only cash basis of high possibility of bad debts(Nuhu, Baird and Bala
Appuhamilage, 2017).
Job costing reports: These types of reports basically mentions the expenses related to one
product or batch and the income is mentioned against them to depict the profitability of the
production of that particular item or batch. These reports holds great importance in the Big
Yellow company as it is the self storage firm which rents out the storage or space to the people.
For this, the accountant prepares the job cost report for finding out the cost of the space and
income it will generate during the given period. The job cost reports help the management
accounting in deciding whether the project or job should be undertaken or not and to focus on
more profit generating jobs instead on small and low yielding projects.
Manufacturing and accounting report:Big Yellow prepares accounting reports in order to
make the company more effective and financially sound. Manufacturing reports include labour's
wage rate per hour, amount of raw material to be used and time when it is yo used are given,
overhead expenses for a unit. These are prepared by the company to make its productivity
increased and production process optimally efficient. Accounting reports generally includes the
income statement, cash flow statement, and balance sheet to show what the company has earned
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during the given period and what is the position of the company at the end of the given period.
These reports are made for both external forces such as stakeholders, investors, government and
also detailed reports for helping the management of the company in their decision making
process(Joshi and Li, 2016).
Big Yellow uses these different reporting methods in its management accounting systems
so that the performance of the organisation is measured and compared with the firm's planning,
strategies and budgets. More specifically the performances of each department of Big Yellow is
compared with the benchmarks already set by the top management and to determine the
outstanding performance of the various departments and then rewarding them.
Management accounting have several advantages to the Big Yellow:
Planning is effectively done through management accounting, controlling function can be
exercised through preparation of various reports, benchmarking etc. The management accounting
has helped the company in its decision making process to be more precise. The company has
effectively solved its business and financial issues through this systematic accounting
management and efficiently setting up of the goals for the accounting department(The
Advantages of Managerial Accounting, 2018).
LO 2
P 3 cost techniques and income statement
Cost techniques use company Big Yellow for the analysing company resources,
businesses transaction and other activity that will be use analysing in term of money. In cost
accounting accompany used term associated in the costing that are fixed cost, veritable cost,
direct and indirect cost, incremental cost, opportunity cost and sunk cost. And total cost.
Techniques of cost:
Marginal costing: the managerial costing define difference between the fixed and
variable cost. Managerial costing is calculate chargers of cost unit, fixed cost and other direct
and indirect. Fixed cost is included in this costing method. That helps business in order to
generate net profit. One of the main advantage of using this technique is that it is easy to
understand and implement. This is standard method that is used by Big Yellow in order to
calculate the net profit of fiscal year. It is beneficial for the firm in order to make plan for profit.
Generation. This allows business in order to record cost and report it properly. Cost control can
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be used easily that aids business in order to minimise wastage and enhance profitability of
organisation to great extent(Szychta and Dobroszek, 2016).
Marginal costing Equation:
sales – variable cost = fixed cost + profit.
Example
sales 100000
marginal sales cost
direct material cost 24000
labour cost 14000
variable production overhead 9000
administration cost 4500
total cost 51500
contribution 48500
fixed cost: production overhead 7000
distribution cost 5000
total cost 12000
net profit 36500
Interpretation: By looking at the calculation it is analysed that total sale of the company is
62000 in which direct material and cost of direct labour are included. Total variable cost is
48500. Fixed cost of the business is 12000. After calculating the all these cost net profit for the
organisation is 36500. It shows that enterprise can generate this profit if it implements the
marginal costing method.
Absorption costing :
It is a method of calculate actual cost under absorbed. It identifies manufacturing cost and
unit production. Cost of finish goods in stock will be include direct material, direct labour and
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both fixed and variable cost. In this of costing method, company includes all type of
expenditures such as direct labour, material, manufacturing overhead etc.
example
sales 100000
cost of sales
material cost 24000
labour cost 14000
cost of sales 7000 45000
gross profit 55000
admin and distribution cost
variable
fixed 4500
total cost 5000 9500
net profit 45500
Interpretation: From the above table it is identified that total cost of sale is 45000. By
subtracting sales revenues from total sales cost result is found 55000. When variable and fixed
expenses are being subtracted from gross profit then actual net profit is got 45000.
By calculating absorption and marginal costing it can be interpreted that Big Yellow
needs to take support of absorption costing technique because net profit is high as compare to
marginal costing method(Thomas, 2016).
LO 3
P 4 advantage and disadvantage of budgetary planning tools
There are various kinds of planning tools that are used in budgetary control system in the
organisation. Big Yellow is required to analyse each technique carefully before implementing it
in its actual practices. Advantage and disadvantage of various tools are explained as below:
Zero based budgeting (ZBB)
ZBB is considered as reverse approach and a traditional planning tool. This supports the
financial manager of company to take correct decision with respect to budgeting. In this method,
individual first looks upon the previous budget and review the earlier budget. If some issues are
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identified then financial team makes changes in previous budget in order to prepare budget for
current year(Modell, 2014).
Advantage
 This is best tool that helps the Big Yellow in order to make correct decision of allocation
of resources. Through this technique enterprise can analyses needs and benefits carefully
and can make correct decision for the growth of organisation.
 This approach supports manager of Big Yellow in order to find cost effective ways
through which overall activities can be improved .
 This is helpful in finding outsourcing opportunities for the organisation. It aids in improving efficiency of operations by minimising unnecessary cost.
Disadvantage
 If it is largest organisation or big scale firm then it would be time consuming process to
makes decision of budgeting through zero based approach.
 As this is traditional method thus, more paper work is involved, this enhances chances of
occurring mistakes.
 Administration and communication problems may affect overall results.
 ZBB pays less focus on cost centres.
 It is complex process because managers have to analyses previous budget in detail.
Activity based budgeting (ABB)
ABB is another planning tool that is used for budgetary control in business unit. This is
modern approach that increases transparency into entire process of budgeting. In this method,
manager of the organisation includes inflation cost or business development cost in order to
make changes in budget. Manager of Big Yellow can research the efficiency of existing
operations and find out development necessity in order to prepare new budget. This type of
budget generally applies in the newly established companies. This is helpful in high degree of
cost planning(Nuhu, Baird and Bala Appuhamilage, 2017).
Advantage
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 Activity based budgeting supports the organisation in order to reduce costing. By this
way manager of the Big Yellow can find out efficiency of operation and improvement
areas. This allows in making correct decision to reduce the unnecessary cost and provide
opportunities to enhance net profit of the firm.
 ABC budgetary control approach is helpful in making quick decision. As authorities can
measure nature of each activity thus, it becomes easy for them to analyses these detail
and take quick and correct judgement.
 There are two major kinds of activities: value adding and non value adding activities.
Activity based budgeting controlling system can support Big Yellow firm in paying more
emphases on value adding activities and eliminating focus from non-value adding
activities. Activity based costing mechanism allows business to use available resources effectively.
Disadvantage
 ABC method cannot be used by small scale organisation.
 If the firm is producing the single product then this budgeting controlling or planning
process cannot be used.
Incremental budgeting
This is another kind of budgetary controlling technique that is used by most of the
business. In this tool, manager of business involves revenues and sales of current year in order to
take decision. By adding these details manager of the firm forecast future sales and trends. On
the bases of changes in sales percentage overall profit is calculated.
Advantage
 This is simple and easy to implement method. By implementing this system manager of
the firm can make quick decision.
 This method can be used in the situation where stable environment is here. If things are
constant and not changing then in such condition this type of planning tool can be used. This approach is helpful in ensuring operational stability. This helps in controlling over
cost and making correct decision through which profit can be raised(Otley, 2015).
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Disadvantage
 Budgetary review is quite difficult in this planning tool because this method don’t include
changes in material or sales.
 Cost of making decision is too high. This is also encouraging laziness.
Top down budgeting
This is another type of technique of budgeting process. In this manager of business has o
estimate the cost involve in each activity and has to determine constrains. This helps in making
correct planning decision through which firm can minimise risk and can raise profit of
organisation by taking correct decision.
Advantage
 This is better approach that helps manager in making effective financial control.
 One of the main benefits of using this technique is that it takes less time to calculate
overall budget and make correct decision for budgetary control.
 It is helpful in promoting upper level commitments Top down budgeting supports manager in understanding the current situation of company
effectively and involving participants so that suitable decision can be
Disadvantage
 Inaccurate forecasting is major drawback of this technique. By applying this method
manager of the firm cannot calculate the future sales and cannot forecast the actual
demand.
It may affect the employee’s moral as well because this does not consider the input(Warren Jr,
Moffitt and Byrnes, 2015).
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LO 4
P5 Comparing how the Big Yellow adapting accounting management in respond to financial
problems
Big Yellow is using certain criterion in adapting accounting management for resolving
their financial problems which are given below:
There are various financial issues in Big Yellow such as:
 Stability in profitability: The company is facing problem in earning stable profits
which can be resolved using management accounting tool, benchmarking. Benchmarking
means measuring the performance of the company and comparing it with other the
company or companies belonging to the same industry. Usually the market leader's
financial performance, quality goods and services, time, and other practices are used for
setting the benchmarks in the industry and the other competing firms tries to achieve and
surpass that benchmarks to lead the market(Uyar and Kuzey, 2016).
Big yellow for instance, dealing with low sales, it can use the benchmarking technique by
applying the different tactics and marketing strategies to increase the sales. Benchmarking will
help the management of the company to evaluate firm's performance with other firms in the
industry and conclude better decision and identify the reasons that why the company was lagging
behind from other players in the industry and by how much margin. Similarly, Big Yellow can
set the target of industry's benchmarks regarding the quality of the products and services which
are creating the financial problems for the enterprise. Company will accordingly prepare its
plans, budgets, performance parameters for achieving the target quality products and services
which will attract more customers, built the brand image, lead to increase in sales and eventually
will be an answer to Big Yellow's financial issues and take the company at an upper position in
the storage industry ahead of its competitor.
 Excess Cash outflow: Big Yellow is troubling with excess cash outflow from the
business which is hampering its liquidity position in the industry. The company can focus
on its key areas and on its key performance indicators to control the excess cash which
going out from the organisation. Key performance indicators are used by the company to
judge the firm's overall performance in quantitative terms. This aspect of management
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accounting helps the assistant manager to detect the key factors that affects the growth of
the company(Nimtrakoon and Tayles, 2015).
There are several performance indicators that can be used by Big Yellow to evaluate the
performance and focus more on core areas to solve the financial issues, some key financial
performance indicators are given below :
Profitability: Big Yellow's ultimate success lies in the factor called profits earned by the
company. A company is formed with the mission of earning profits which will lead it to the road
of success in the future. This financial parameter is used by the company to analyse and evaluate
its gross revenue that is its sales as well as its net profit after taxes which increases the
shareholders' wealth and increase the value of the company in the market. This can be done by
properly adapting to the management techniques of planning, forecasting, applying budgetary
control tools and monitoring the strategies formulated by the company and determining the
deficiencies so that it can be corrected and more effectively the plans and policies could be
implemented for achieving the organisational goals and objectives(Otley, 2015).
Cost: Cost is the another key performance indicators that decides the success or failure of an
organisation. Management of cost has helped the Big Yellow to take control its costs and become
a cost effective company in the market.
Processing time of production : The time taken by Big Yellow for converting its raw materials
into the finished goods is also one of the performance indicators which can be measured and
evaluated to find out average time cycle of production. The company has applied process costing
to know the cost of each process in the production and compare it with the other firms and with
its own estimated figures, for figuring out the deviations in the results. Management accounting
has helped the managers to reduce the cost associated with each process for facing the financial
issues of the company.
Customer satisfaction: By providing the quality products and services to the customers at the
reasonable prices will increase the customer satisfaction for the company. This key performance
indicator of Big Yellow helps it fights against the financial problems of the company as it is the
customer satisfaction that company wants to achieve for stable sales, profitability. This is also
Big Yellow's competitive advantage over other firms in the industry.
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 Credit policies for debtors: The organisation is dealing some issue in collecting dues
from its debtors which is hampering its working capital cycle. The company needs to
change the credit policies for the debtors by using the accounting techniques to find the
appropriate credit period that should be provided to its customers((Warren Jr, Moffitt
and Byrnes, 2015)).
 High corporate taxes : Big Yellow is finding itself in financial issues in paying the high
corporate taxes. Accounting specialists will make adequate provisions for taxes that are
to be paid at a later date to ensure that company do not find problems in paying the taxes
to the taxation authority.Big Yellow uses financial governance for meeting the financial
problems and solving it effortlessly. The financial governance term means the style and
ethics of the company in gathers the financial data, how it manges and monitors its
financial information. In more specific terms, it means how the company keeps the
record of the business transactions, are they applying the basic accounting principles and
conventions in their recording of the data.
Big Yellow collects and organises its financial information according to rules and
regulations prescribed in the legislations of the country for avoiding any penalties and
disruptions in its operations. The adaption of management accounting has made it easier for the
company to meet the legal requirements of the state because of its systematic approach of
dealing with the financial issues though various accounting and reporting methods.
It is evident from the above factors Big Yellow that efficient management accounting
leads the company towards success path by making it more cost effective, high quality goods by
regular check on production and timely purchase of inventory through inventory management for
assisting the production department of the company. All these things helps the company to
achieve its organisational goals and objectives(Abdel-Maksoud, Cheffi and Ghoudi, 2016).
The methods of management accounting has helped the company to cope up with its financial
issues. Like benchmarks gave the company a base against which all the employees performed to
match the standards set. Tax provision in the start of the year has helped company to pay its tax
obligations on time.
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CONCLUSION
From the above report, it has been summarized that efficient management accounting
system in the Big Yellow company has helped to achieve it targets and goals. The project report
showed the different management accounting system within an organisation and their importance
in the organisation in attaining the set standards. The study focussed on various methods of
reporting such as budget reports, performance reports, debtors ageing reports which how showed
how these factors affects decision making process of the top management. The report covered
the calculation part of the study which was calculating the profit, income statement of the
company by using different techniques of allocating the cost to the products and services which
were marginal costing and absorption costing. The two methods treats the direct and indirect
costs of the products and services in different manner. It was also seen the advantages and
disadvantages of various different planning tools used in budgetary control such as zero based
budgeting, abc analysis. The crux of the project report was that an effective management
accounting in Big Yellow has made it a successful organisation in the storage industry by
systematically managing the accounting department of the company and ensuring the proper
coordination and cooperation with the other departments in the firm.
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Online
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