Management Accounting Principles

This report provides an insight about the principles of management accounting (MA) and its role in organizations. It discusses different management accounting systems such as cost accounting, inventory management, job costing, and price optimization. The report also compares planning tools for budgetary control in accounting management.

Management Accounting
Principles

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK ONE......................................................................................................................................3
PART A...........................................................................................................................................3
1. Management accounting (MA) and its principles...................................................................3
2. Role of MA and MA system...................................................................................................3
Way Management accounting is integrated within an organization...........................................6
PART B............................................................................................................................................6
TASK TWO.....................................................................................................................................7
PART A...........................................................................................................................................7
Comparison and contrast between planning tools that are used for budgetary control in
accounting management..............................................................................................................7
PART B............................................................................................................................................9

INTRODUCTION
Management accounting is an important part of accounting with the main aim of
providing in-depth and meaningful information to the internal managerial team. It is different
from that of financial management as it considers both monetary and non-monetary aspects
while taking decision. This report provides an insight about the MA and its systems and
techniques that can be used for various purposes. The different planning tools in mA and the
usefulness of MA in responding to financial problems.
TASK ONE
PART A
1. Management accounting (MA) and its principles.
MA is basically the technique or a process which is being used for the purpose of analysing the
business operation and its performance through the way of preparing the relevant reports and
accounts for assisting the management in undertaking the decision.
Principles of MA
Designing and compiling: The business related information should be compiled and
recorded in an appropriate manner which can be easily understood by its users and meets with
the business requirement.
Management by exception: It useful while presenting the information, which means that
the budgetary control system and the costing techniques is being applied (Ameen, Ahmed and
Abd Hafez, 2018). Through this way, the pre-determined budget is compared with the actual
outcome in order to determine the deviation.
Absorption of Overhead Costs: The overhead cost pertaining to the production is
absorbed in a pre-determined basis. Therefore, the method selected should bring in the accurate
and right result.
2. Role of MA and MA system
Role of MA
Developing financial strategies: With the help of the budgets and other useful reports,
the management accountants of the organization can undertake decisions with regard to forming
strategies.

Monitoring expenses: The management of the organization can prepare different types of
budgets which can be static, flexible or the rolling out, that permits the leader or the managers in
effectively monitoring the expenses (Ghasemi and et.al., 2016).
Maintaining profitability: The management accountants can make use of various tools
which will help in ensuring the profitability by the way of break even analysis. It will help
determine the various cost incurred by the organization.
Management accounting system and its benefits
Cost accounting system
It is used by the manufacturers for the purpose of recording the various production
activities with the help of perpetual inventory system. It used for determining the cost and
profitability associated with each of such activity.
Benefits:It helps the management in measuring the efficiency in regard to the cost and time.
This also assist in reducing the expenditure which is unnecessary.
Application: This system is basically used by the manufacturing companies in keeping track of
the cost incurred in different process.
Inventory management system:
This MA system works on ensuring that the goods are moving at the right place and at
the right time (Shields and Shelleman, 2016). In simple words, it records the movement of stock
from one process to another and the timely delivery of the same to its end users.
Benefits: It works on reducing the inaccuracies which earlier caused due to human error. It also
helps in maintaining the right level of inventory which leads to reduction in wastage.
Application: This system is mainly used by the organizations which are required to maintain
huge stock of inventory.
Job costing system:
Under this system, the cost is assigned to the various activities with respect to the specific
job involved. It is useful in keeping track of the cost pertaining to each job which is important for
the business operation.
Benefits: The profitability attached to the each job can be easily determined and it also provides
with the basis in determining the cost of the other similar jobs.
Application: It is mainly useful in the construction industry or the other industry where cost is
required to be allocated to the multiple projects.

Price optimization system:
This process is used for determining the price of the product considering the willingness
of the customers to pay for it (Oboh and Ajibolade, 2017). This system works on determining the
maximum profit that can be gained as it considers demand and supply.
Benefits: It supports the businesses in setting the right price which helps in achieving its goals
and the entire process is automated which will result into no error.
Application: This system is useful for the retailers in determining the impact of its promotion
activities on the price of the product and on the overall profitability.
Evaluation of use of techniques and method that can be used in management accounting and its
benefits for organisation.
Management accounting is a process that includes preparation of reports so that manager
of firm can take accurate short and long term decision of organization. Through accounting
reports manager is able to collect accurate information about total expense and profit during
financial year thus decide appropriate strategies that can be used to gain competitive advantages.
There are different method or techniques used for management accounting reports such as:
Cost reports: It is type of report that includes key information such as labour, overhead,
expenses or charges that are incurred by company in order to manufacture particular products
and services (Maas, Schaltegger and Crutzen, 2016). Cost report consist both fixed and variable
cost so that total cost can be divided with actual products manufactured in order to set
appropriate prices of products. Therefore, it can be stated that cost report helps manage in
comparing with selling prices with price of goods thus setting right prices that can contribute in
satisfying needs of customers in the best possible manner.
Budget reports: Budget are prepared by every organisation to plan total expenditure it
has to incurred in particular years and find alternative sources form which fund can be arranged
for smooth operation of business. It specifics all sources of income and expense related to firm
during financial year so that manager can take corrective action for achievement of company
goals (Honggowati and et.al., 2017). Company main objectives is to complete its overall
objectives in specific budget so that it can earn more profitability at minimum cost. Therefore,
budget report helps manager in maintaining control over financial outcome of business so that
company can grow and expand its business in competitive market.

Inventory report: It is another method or report which is used in management
accounting as it include key information related to total amount of inventory present in the firm.
Company can make use of physical or electronic document in order to record data related to total
inventory at particular point of time and need to be in future for satisfaction of customers
requirement (Hiebl and Richter, 2018). Manager through inventory report is able to control cost
and make the best utilization of resources by ordering raw material as an when required. Thus, it
helps in management of stock, reduce in wastage of resources and delivering products or services
to customers within limited time frame and cost.
Way Management accounting is integrated within an organization
Management accounting generally used to help the organization in making variety of the
different type reports in regard to the issue which is faced by the organization and solution of the
same. This types of reports generally used to help the management at the time of making variety
of different type of the decision in the organization. On the basis of the same decision
organization is able to improve the productivity and profitability of the business in the positive
manner. This integration also help the company in getting ready for variety of future uncertainty
as well.
PART B
Absorption costing: It is required for financial reporting as it content all cost that are
incurred in manufacturing of particular products and services of company. Absorption costing
includes both direct and indirect cost some of them are rent, insurance, labour and direct material
that are used in production or delivery of services.
Marginal costing: On the other hand margin cost can be termed as additional cost that is
incurred by enterprise in order to manufacture additional unit in the organizations. So, in margin
costing, fixed cost are treated as expense or cost during particular period and variable cost is
included in actual cost of products.
a)
Absorption cost per unit
Variable cost 5

Administration cost 0.03
Selling and distribution cost 0.028
Variable expenses 3
Fixed cost 0.34
Total 8.398
Marginal cost per unit
Variable cost 5
Administration cost 0.03
Selling and distribution cost 0.028
Variable expenses 3
Total 8.058
b)
Income statement under marginal costing
Sales (350000*15) 5250000
Less: Marginal cost of production
Variable cost (350000*5) 1750000
Administration cost (350000*0.03) 10500
Selling and distribution cost (350000*0.028) 10000
Variable expenses (350000*3) 1050000
Total variable cost of production 2820500
Add: Opening inventory (2820500/350000*90000) 725271
Less: closing stock (2820500/350000*200000) 1611714
Total cost of production 1934057
Contribution 3315943
Less:
Fixed cost 120000

Fixed expense 100000
Depreciation expense 21000
Salaries 200000
Total fixed cost 441000
Net income 2874943
Income statement under absorption costing
Sales (350000*15) 5250000
Less: Cost of production
Variable cost (350000*5) 1750000
Administration cost (350000*0.03) 10500
Selling and distribution cost (350000*0.02857) 10000
Variable expenses (350000*3) 1050000
Fixed cost 120000
Total cost of production 2940499.5
Add: Opening inventory (2940300/350000*90000) 756077
Less: closing stock (2940300/350000*200000) 1680285
2016291
Gross profit 3233709
Less:
Fixed expense 100000
Depreciation expense 21000
Salaries 200000
Total fixed cost 321000
Net income 2912709

Interpretation: It can be inferred form the above that the profit under absorption costing is
higher than marginal method which is because the Absorption costing considers both direct and
indirect cost which is not the case of marginal costing resulting into difference in the amount.
The absorption costing is widely used as it also used for the financial statement reporting and
meets with the IFRS requirement as well.
TASK TWO
PART A
Comparison and contrast between planning tools that are used for budgetary control in
accounting management
Budgetary control is system that is used to control overall cost by coordinating with
several departments that actual fund that they will require in order to accomplish particular
activities. The main objective of budget control is make optimum utilization of resources so that
company can earn maximum profit margin and achieve its goals. Thus, it is process that is used
to monitor performance of organisation in terms of monetary. There are differences planning tool
that are used by firms for budget controlling such as zero based budgeting, capital budget and
activity based budgeting. Such as:
Zero based budget: It is one of the planning tool for budget control in which no base is
considered or used for preparation of budget of firm (Taborda and Sousa, 2020). Each expense
are justified for every new period, or are made as per needs and requirement in organisation.
Thus, each year new budget is prepared regardless of budget in previous years for effective
operation of business.
Advantages:
 Emphases more on decision making thus it meant overall expense that company will
incurred in order to proceed particular activities so that it can gain competitive
advantages.
Disadvantages

 The biggest disadvantages of zero based budgeting is that it is does take into consider the
expense that are made for longer time frame. At the same time it is difficult for manager
to understand expense that are essential or not so its benefits are in qualitative nature.
Capital based budgeting: It is another type of budget controlling that includes effective
evaluation of major or big investment that company in planning to make in future circumstances
(Aureli and et.al., 2019). Thus, it is mostly used to determined that way long term investment
such as machinery, building are wroth for investment through capital structure or not.
Advantages
 Capital budgeting helps manager in understanding associated risk with particular long
term investment and its impact on company operation.
Disadvantage
Future is uncertain so prediction or assumptions made by such method may not be beneficial for
the organisation.
Activity based budgeting: In this type of budget control, management analysis and interpret
actual cost that is incurred by company to complete particular activity on basis of previous years.
Thus, manager make use of record and previous data in order to set budget for future financial
years so that all expense can be meet and company can attained its objectives.
Advantages:
 Manager through activity based budgeting can eliminate activities that are unnecessary
thus save cost of firm and helps in gaining competitive advantages.
Disadvantages:
 Activity based budgeting is complex in nature as it require effective analysis and
evaluation of each factor before deciding actual expense that need to be incurred in
particular activity.

PART B
Management accounting can be applied in variety of the different way in general. All the
organization generally used to adopt the management accounting by considering variety of
different method. For example in the Case of Corus Technology organization has adopted the
cost accounting system in a way that it used to help them in improving the efficiency of task
carried out in the organization (Sohrabi, 2017). It has been identified that In the late ninety's
organization generally used to outsourced their operation to other companies this used to
increase the cost of the product in the long run. For the same reason to reduce the cost of the
company organization management has taken the decision to improve the level of technology
used by innovating a tool in which lamination was possible in the organization itself. Hence,
with the help of this type of technology usage in the organization, Corus was able to adopt the
Cost management system in the best way and it has also helped the company in reducing the cost
of the product. This has helped the company in getting competitive advantage in the market as
well.
At the same time in the case of Coco Cola it has been identified that they used to adopt
the inventory management system in the organization to see good sort of the success in the
market. As case study identified that Coco Cola has changed the offering of the company on the
timely basis so that consumer in the market are attracted toward the product of the company.
Case study highlights that in the past the company was only selling coco cola as their product
but in last 20 years they have managed their inventory in the best way possible. As company has
acquired variety of the different soft drink selling companies (Rizza and Ruggeri, 2018). This has
helped the company in expanding the product line of the company in the market as more number
of product is offered in the name of Coco cola. It has also helped the company in managing the
competition in the best way possible in the market. Not only that it has been also identified that
Coco Cola has also managed the inventory in the best way possible by improving the quality of
marketing and consumer understanding in the market.
CONCLUSION
It can be concluded from above report that management accounting plays an important
roles in planning, controlling and monitoring activities that can be used in effective achievement
of goals. There are several methods that are used by manager in order to maintained records of

accounts so that it can take accurate decision for growth and success of enterprise. At last, it can
be concluded that budgetary control techniques helps in the best utilization of financial resources
so that company can gain competitive advantages.

REFERENCES
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