Application of Management Accounting Principles in a Business Context

This report delves into the core principles of management accounting and their application within a business context. It begins with an introduction to management accounting systems, differentiating them from financial accounting and highlighting their importance in planning, decision-making, and strategic planning. The report then examines various components of management accounting systems, including cost accounting, inventory management, and price optimization. Furthermore, it explores management accounting reports such as budget reports, inventory management reports, performance reports, and accounts receivable aging reports. The report also analyzes cost analysis techniques, specifically marginal costing and absorption costing, and their application. Finally, it discusses planning tools used for budgetary control, including cash budgets and capital budgeting, and their advantages and disadvantages, concluding with the relationship between management accounting systems and financial problems.

Management
Accounting Principles

Introduction.................................................................................................................................................3
Task 1..........................................................................................................................................................3
P1 Management accounting system.........................................................................................................3
P2 Management accounting reports.........................................................................................................6
Task 2..........................................................................................................................................................7
P3 Techniques of cost analysis................................................................................................................7
P4 Planning tools used for budgetary control..........................................................................................8
P5 relationship between management accounting system and financial problems...................................9
Conclusion.................................................................................................................................................10

Introduction
Management accounting is an integral part of management of any organization. It
basically takes care of analysis and interpretation of financial data. This process aids in planning
and decision making process of the company. There are several theories and techniques those
can be used for the above process. Ultimate objective of any organization is to earn maximized
profits which can only be achieved by formulation of efficient strategies. Tools and techniques of
management accounting help in formulation of such strategies that assist in reaching the desired
objective. In this report, prime focus is on application of management accounting principles on a
particular business. Various concepts like management accounting system, management
accounting reports, costing methods, absorption costing, marginal costing will be discussed in
order to develop understanding of concepts so as to apply them to achieve desired outcomes.
Task 1
P1 Management accounting system
Management accounting refers to most important helping tool that is available to
managers. It helps in monitoring and controlling of financial transactions and related things of
business operations. It is not using whole of data that is provided by financial accounting
process. Rather, it is very selective in nature and therefore, uses only some information. Choice
of information is basically on the basis of their capabilities of contributing in formulation of
efficient and effective strategies (Chan and et.al., 2015). One of the most important concept
under the big umbrella of management accounting is management accounting system. It refers to
the analysis of processes of every branch of that organization in a systematic manner and this
manner is known as management accounting system.
There is huge difference between management accounting and financial accounting which are
enumerated below:
Basis Management accounting Financial accounting
User It acts as helping aid for internal
stakeholders such as managers
(Chen, Lee and Shevlin, 2016).
This information is used by both
internal and external users, so as to
know about the financial position of
the company.

Regulation This is not mandatory to follow in
organization, as it is not regulated
by any legal obligation.
It is essential to follow as it is
regulated by laws and policies.
Audit As it is not compulsory to conduct,
therefore, audit also becomes a
option that if not followed do not
invite any intervention.
Audit of financial statements is a
mandatory process to be followed
as it checks the true and fairness of
financial statements. This is
conducted by the professionals and
stakeholders do depend on
judgments of these professionals
(Christensen, Skærbæk and
Tryggestad, 2019).
To certify the importance of management accounting for an organization following arguments
can be given:
 Planning and decision making- Management accountant play the important role by
formulating decisions and strategies for organization, these policies and strategies help
lower level executives to work and achieve desired objectives. These strategies are
formed with the help of useful information like budgeting, ratios, etc. that is generated
from methods and techniques of management accounting.
 Pro activeness- This means being prepared in advance for the problems that may occur in
future. With this strategy, possible losses can be mitigated. Management accounting plays
this important role in a company as it identifies the areas of problems and also attracts
attention of managers to that area. This will help in preparing company before hand and
losses can also be reduced. For instance, budgeting calculates variation in actual
performance and expected (or budgeted) performance, this process helps in identifying
those areas due to which expected results could not be generated. Now the company can
prepare itself for those areas and can also take corrective measures if required.
 Strategic planning- Management accounting helps managers in identifying any fault in
already formulated strategies and policies. This will result in formulation of appropriate
strategies which ultimately results in success of organization (Dunbar, Laing and
Wynder, 2016).
Branch of management accounting coordinates with every department of a company and then
this established connection produces a separate management accounting system which manages

all transaction of that function of company. Various management accounting concepts have been
discussed below:
 Cost accounting system: It is most used technique by manufacturing industries. The main
role of this system is to monitor and control every type of cost that is incurred in
company. These cost may relate to any department of organization, for example, cost of
procuring raw material, cost incurred in production process, day to day expenses, cost of
logistics department, etc. This pervasive process helps managers in identifying the areas
which are incurring higher cost than what is required to be spent. This system will help
in deciding that which area needs cost cutting and which is that department which if
invested more will generate higher profits. This system helps in improving productivity
and profitability of organization (Ho and et.al., 2015). In this system, there is a break up
of cost under different heads like fixed cost, variable cost, semi variable cost, marginal
cost, etc. This break up of costs under different heads according to their nature helps
managers to take decisions regarding strategy formulation of cost in the given company.
 Inventory management system: This system is basically governing the flow of stock in
company. This means it regulates the policies that states from where the inventory will be
procured, in how much quantity and what value, when it will be ordered, how it will be
allocated for further production, etc. these all tasks are performed under this system. This
system also manages related databases like barcode, labels, etc. This will ensure
uninterrupted flow of inventory and also no overstocking and under stocking. This
system maintains availability of raw material as and when required. This system also
ensures that there is no duplication at the time of ordering of stock.
 Price optimizing system- This is a process of determining prices of products and services
of a business. This tool helps management in identifying appropriate pricing strategy so
that they can establish the business well in the market place and within the targeted
customers. An appropriate pricing strategy can be defined as that price level of products
and services which attempts to attract more and more customers and also creates a loyal
customer base. This will generate competitive advantage for business. This setup of price
is in accordance of willingness and ability to pay by customers.
P2 Management accounting reports
Reporting refers to the process of communicating results of management accounting
systems to the managers so that they can use this information in formulation of strategies and
policies (Hrabal, 2016). Some reports are explained below:

 Budget reports: This refers to those statements which generate results or information for
the pre set budgets related o specific department. For instance, budgets are prepared for
standard output, now the budget report will tell the outcome of all these matters showing
the difference between the expected output and actual output. This will help in taking
corrective measures to see how the productivity can be improved.
 Inventory management report- This report shows data relating to inventory of
organization, such as, EOQ, amount of wastage, quantity of raw materials used in
production process, lead time, etc. This will make the maintenance of records of
inventory a very easy task and will also reduce the chances of frauds due to transparent
management of whole inventory process in organization. This is a very useful method for
a manufacturing industry (Lippert, 2015).
 Performance report: This is a statement showing performance of employees and
company as well. To achieve desired objectives, it is necessary that all the aspects of an
organization perform well. Therefore, it becomes necessary that it is evaluated from time
to time. For this purpose, performance reports are formed. This also plays a vital role in
evaluating financial position of business. This report contains various important data like
profitability statements, returns, flow of cash, etc. This report provides assistance to
management of enterprise to plan for future course of action so that efficient and effective
operations can be ensured.
 Accounts receivable ageing report- This report focuses on management of flow of cash
related to the credits allowed by the company. This report contains particulars like name
of debtors, transaction date and amount blocked with debtor, etc. There are different
rimes allowed as credit time, therefore, transactions for different periods are recorded
separately. Taking this system into use, managers of Prime furniture can manage their
debtors with better credit policies and can help company to recover money sooner.
Task 2
P3 Techniques of cost analysis
Marginal costing: This is a tool for analyzing additional cost for producing one more unit
in addition to the present production. This helps in inspecting into appropriate scale of
production where the cost is minimized and profits are maximized (Shipman, Swanquist and
Whited, 2017).

Absorption costing: In this tool of accounting, total cost is being allocated to different
overheads of expenses according to their contribution in total production process.
Quarter 1
particulars amount
sales
525000
0
less: cost of sales
variable cost (350000*5)
175000
0
admin cost 10500
selling and distribution
expenses 10000
less: fixed cost 120000
less closing stock
300000
0
gross profits 359500
less: expenses
variable expenses (350000*3)
105000
0
selling and distribution as
fixed 10000
salaries 200000
fixed expenses 100000
depreciation 21000
net loss
102150
0
Interpretation: Cost of inventory has been computed by multiplying units produced with cost
per unit. Adjustments are made relating to closing stock so that actual profits for the year can be
obtained. Thus, it can be concluded that right technique has been used to calculate profits of the
company. Constant profits is there in both the quarters (calculated by using absorption costing).

P4 Planning tools used for budgetary control
Budgetary control is a control process that is used to evaluate the comparison between
budgeted and actual performance for a defined period. This procedure is used for evaluating the
performance by management. After monitoring performance, differences are calculated and
accordingly corrective measures will be taken and implemented in the organization. Following
planning tools can be used:
Cash budget: In this budget, cash inflow and outflows are estimated for a future specified time
period. These budgets are based on past records and performance. This budget helps
management to ascertain whether company will confront surplus of liquidity or deficit in the
coming future. It will help in management of business in optimizing planning and utilization of
cash and cash equivalents.
 Advantages – Cash planning helps management in planning smooth disbursement of cash
according to availability and inflow of cash. They could avoid both cash crunch as well
as over liquidation in cash. Disadvantages – It is prepared on the basis of past records and future estimation.
Uncertainties in external business environment can upset cash planning and can cause
rigidity in business operations.
Capital budgeting:
The main objective of every business is to grow. This growth is possible only in the case
when business takes up new projects and proposals. These projects requires huge amount of
investment, thus, it will require an in- depth study of all aspects of that new project. One of the
important analysis in this direction is capital budgeting. It means comparing expected revenues
and cost of proposed project. This will help in finding the profitability value of that project. This
technique is applied to all the alternatives available, so that the most profitable can be chosen and
this huge investment is not blocked. This technique is very important as it involved large amount
of funds and if the project fail that it may lead to wastage of those funds and also a hazardous
effect on business. This may even lead to shut down of enterprise.

 Advantages – Capital investments require huge funds and then those funds get blocked
for a long time. Any wrong investment can create problems for financial health of whole
organization. Evaluating investment alternative helps management in averting such risks.
 Disadvantages – Capital budgeting techniques are based on understanding of financial
managers. Any wrong assumption taken by them can give financial well being of
company a fatal blow.
Planning tools used in budgetary controlling
Planning tools are used by management to prepare plans for monitoring and controlling. Tools
such as multiple types of budgets present management with various targets that company has to
fulfill over the specified period of budget. It also helps management in identification of variances
and serves as basis for corrective actions. With the help of tools such as capital budgeting,
management can avoid major financial problems (Sithole, 2015).
P5 relationship between management accounting system and financial problems
Financial problem: This issue can be defined as those issues which are confronted by an
enterprise while operating in a business environment. These are the problems which arise due to
failure in managing financial stability of business. These issues can arise due to various reasons
like decrease in sales volume, increased expenses, loss of growth opportunities, etc.
Sales downfall: In lifecycle of products, there are stages which confront decline in sales.
This is due to several reasons like increased competition, difficult business environment,
uncertainties in factors affecting sales volume, etc. reduction in sales volume puts direct impact
on revenue generation cycle and growth opportunities of business. This istuation is usually
confronted in maturity and decline stage of business.
Increased cost of raw materials: Increase in cost of raw materials can be due to multiple factors
such as increase in prices of logistics, increase in bargaining power of vendor, taxes hike, etc.
Increase in cost increases operational expenses and decreases profit margin. It can also lead to
increase in price of product which again can have negative impact on sales of company products.
Financial governance – It refers to the system of practices in which a company control
its financial information. Companies track their financial transactions and perform control
operations in the interest of its stakeholders. If a company is able to identify its risk earlier, it can

devise a strategy accordingly to avoid it. Proper governance with monitoring and control allows
an organisation to identify the risk coming its way faster.
 Benchmarking - There are multiple companies working in an industry as close
competition of each other. Benchmarking is a performance indicator in which
performance of one particular organisation is taken as standard of average performance of
the other company's of that industry. This technique is used by managers to identify the
areas where they can improve to reach benchmark.
 Key performance indicators (KPI) – This technique is used to assess the multiple aspects
that effect an organisation. They can be financial and non-financial aspects. Financial
aspects includes indicators such as profits, debts, etc. while non-financial aspects refers to
the external factors such technological factors, market factors, etc.
Budgetary targets – Companies prepare multiple budgets and budgetary targets. Managers then
evaluate organisation's actual performance against those set targets. Deviations are determined
and corrective measures are taken
Conclusion
In above report, various concepts relating to management accounting have been
understood. This will help in formulating effective and efficient business strategies for future.
This formulation is in accordance of the objective to gain maximized profits. Concept of
management accounting relates to every function of organization so that overall performance can
be ensured.

References
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