Management Accounting Principles and Methodologies

This report discusses the principles and methodologies of management accounting, including job costing, price optimization, and inventory management. It also covers various types of management accounting reports and the calculation of costs using absorption and marginal costing methods. The report evaluates how management accounting is integrated within the organization and the benefits it provides, such as decision-making and planning.

Management accounting
principles

Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
TASK 1............................................................................................................................................1
Principles of Management accounting.........................................................................................1
TASK 2 ...........................................................................................................................................2
Role of management accounting and management accounting systems 150..............................2
TASK 3............................................................................................................................................4
Various methodology of reports of management accounting......................................................4
Calculation of costs as well as preparation of income statement using costing methods of
absorption and marginal...............................................................................................................5
TASK 4............................................................................................................................................7
Evaluation of how management accounting is integrated within the organisation.....................7
TASK 5............................................................................................................................................7
The benefits of the function to the organisation..........................................................................7
TASK 6............................................................................................................................................8
CONCLUSION................................................................................................................................8
PART 2............................................................................................................................................9
TASK 1............................................................................................................................................9
Benefits and drawbacks of different types of planning tools that are used to budget control.....9
TASK 2..........................................................................................................................................10
Comparing systems of management accounting and adressing financial problems:................10
TASK 3..........................................................................................................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14
APPENDIX....................................................................................................................................15

INTRODUCTION
Management accounting is a process of making provisions of financial information for
business development and making its operations more effective along with accuracy. It involves
preparation of reports and accounts that provides accurate as well as timely information to
business. Purpose of using management accounting system is to make better business decisions.
Olde English Sheepskin Limited is a clothing company in manufacturing industry which is
operated in UK offering apparels, fabrics, yarn and fibres. Managers of this company use this
process to identify, analyse and interpret financial data of enterprise to meet objectives of
organisation (Phornlaphatrachakorn, K., 2019). This system offers them accounting information
in order to make formal decisions regarding costing of garments, fabrics, yarn, etc. and helps
them to control business activities within organisation. Within the report, management
accounting systems will be considering along with different methods of management accounting
reports. Preparation of income statement through marginal and absorption costing as well as
calculation of costs through various cost techniques will be used in the report. In present
portfolio, benefits and drawbacks of several tools of planning are used in context to budgetary
control. A comparison of management accounting systems will also be considered to address
financial problems.
PART 1
TASK 1
Principles of Management accounting
Management accounting helps in management of an organisation to achieve better
planning and control over coordination. Preparation of financial statements and reports are
included in this process offering timely as well as accurate information within Olde English
Sheepskin Limited. Through this process the company can easily evaluate and monitor
performance of management in their company by making analysis of financial statements
(Jarwal, C. S., 2018). This process provides information to company about business operations
that helps managers in finding out activities that are generating losses in company. There are
various principles of management accounting and some of them are described as under:
 Management by exception: This principle of management accounting gets followed
when informations or data are presented to the management of the organisation.
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According to this principle, techniques of standard costing as well as budgetary control
system get followed in the process of management accounting.
 Control at source accounting: The various costs within the business are controlled in a
best way at those points at which they are incurred such as controlling of costs at source
accounting. Functioning of human resources within the organisation, details regarding
issues of materials as well as their utilisation and use of services like repairs and
maintenance, vehicles, machines and power are converted in the quantitative and
qualitative information. In such way, control can be practised over the workforce, service
offering devices and materials.
 Use of return on investment: It is also known as returns on capital employed and the
return rate discovers business efficiency. In order to do this, the capital gets employed
and is estimated in relation to the worth of real money.
TASK 2
Role of management accounting and management accounting systems 150
Management accounting comprises of four systems described as under:
Cost accounting system:
An accounting system in which cost of a product is determined and analysed by cost
accountant refers to cost accounting system. Human resources of respected company use this
accounting system to identify cost of fabrics, yarn and apparels manufactured so that they can
judge company's viability.
Essential requirements:
 This system is essentially required in company to find out profitable and
unprofitable operations of business so that activities that are generating losses can
be easily removed or converted into profitable activities.
 To evaluate reasons for losses, this accounting system is required. It helps
managers of the respected company in determining the cause of loss so that they
can face problem by solving or minimizing the losses.
Job costing system:
It is an accounting system in which cost of a particular job or project is tracked according
to customer perception (Fleischman and et.al, 2017). Manpower of Olde English Sheepskin
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Limited use this system to develop a database for determining manufacturing cost of clothing
and other essentials. This system provides them overall information on direct costs such as direct
labour cost, direct material cost, direct overheads, etc.
Essential requirements:
 This accounting system is required to determine performance of human resources
within company. It helps company in assessing data of individual's performance
in respect to their efficiency.
 To formulate the budget of company, this system is required. It helps in getting
details of each job so that cost of particular project is determined and hence
budget can be created by analysing cost of each job.
Price optimization system:
A system in which price of product is determined by calculating variations of demand at
different price levels is known as price optimisation system. Workforce of present company use
this accounting system to determine structure of price at initial level. They also use this system
for ascertaining discount pricing and promotional pricing.
Essential requirements:
 This accounting system is required by company to make fast business decisions
with the help of its automation process which reduces mistake caused by
employees of company.
 For evaluating pricing structure for various customer-base by stimulating how
potential market-share will give response while making changes in price with the
help of data-driven system.
Inventory management system:
It is a system in which inventory of a company is tracked through the way of overall
supply networks for figuring out need of inventory with targeted-audience (Fleischman and et.al,
2017). It helps existing business to control the costs by making an appropriate analysis of stock
report of company's inventory. Employees of Olde English Sheepskin Limited uses this
management accounting system because it helps them in keeping a record of accurate accounts
of stock within the company that helps in identifying data.
Essential requirements:
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 To minimize risk of overselling, company requires inventory management system
so that they can manufacture the stock which are short in their inventory.
 Managers of company require this system to enhance profitability by perfect
understanding of demand of its clothing, fabrics and other essentials.
TASK 3
Various methodology of reports of management accounting
Management accounting reports helps in functions of management as well as compares
real performance with estimated performance. MA reports depicts the financial position of
business over a well- defined period of time. With the help of accounting report, supervisors of
Olde English Sheepskin Limited measures and analyse performance of business and takes
corrective actions to balance actual performance with standard one. There are various types of
MA reports that administration of company use are as follows:
Job Costing reports:
This type of report determines the cost incurred in completing a particular project as
compared to estimated cost of that project. It helps company in evaluating profits accruing from
different types of jobs (Nik Abdullah, N. H., 2018). Employees of existing company analyses
that which type of project or job is releasing more profits and it also enables company in
completing a specific task in an estimated budget. Through this process, managers of company
find areas yielding high-profit margins rather than wasting time on other areas that are generating
low profits.
Performance reports:
A report in which performance of an employee within an organisation is interpreted is
termed as performance report. With the help of this report, actual performance of human
resources of company are compared with their standard performance. This kind of accounting
report helps an enterprise in monitoring and analysing financial position of business by
measuring present year performance of company from its last year (Aouni and et.al, 2017).
Administrators of Olde English Sheepskin Limited use this process to male a check on
performance of a personnel or company as a whole at the end of fiscal year. This type of report is
used by them for making formal decisions for near future by following the company's strategy to
achieve targets.
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Inventory management reports:
This type of report helps an organisation in determining cost of inventory and provides
information to company regarding data related to production and manufacturing process.
Objective of inventory management report is to eliminate risks of running out of stock. The
company follow this method to track their essentials by keeping a record of stock of company
starting from purchase to sale of goods. This type of accounting report helps it in recognising
how, when and what type of inventory is to order.
Operating budget report:
This kind of report which depicts overall forecasted operating revenues and expenses
over a set time period. It helps the respected company to plan for daily transactions of business to
eliminate risks in future. Administrators of Olde English Sheepskin Limited use this kind of
report to motivate and inspire people of the business for meeting goals of company by making
advance planning of functions (Christensen, B. and Himme, A., 2017). OB report helps
company in performing its business activities in an effective and efficient way as it reduces the
cost maintaining profit margin. This budget report tracks information associated with expenses
and incomes as well as facilitates in improving efficiency of business.
Calculation of costs as well as preparation of income statement using costing methods of
absorption and marginal
Income statement
Particulars £s £s £s £s
Product A Product B
Sales 828000 480000
Less: COGS 303600 146400
Direct material 150000 84000
Direct labour 180000 76800
Less: Closing Stock 26400 14400
Gross profit 524400 333600
Less: Fixed cost 264000 264000
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Production 210000 210000
Administrative 54000 54000
Less: variable overhead 129200 62400
Production 120000 56000
Selling 9200 6400
Profit 131200 7200
Income statement under absorption costing
Particulars £s £s £s £s
Product A Product B
Sales 828000 480000
Less: COGS 690000 332800
Fixed production overhead 300000 140000
Direct material 150000 84000
Direct labour 180000 84000
Variable production overhead 120000 56000
Less: Closing stock 60000 31200
Adjustment
Over absorption/ under
absorption
90000 -70000
Gross profit 228000 77200
Less: Non production cost 63200 60400
Variable cost 9200 6400
Fixed cost 54000 54000
Profit 164800 16800
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Income statement under marginal costing
Particulars £s £s £s £s
Product A Product B
Sales 828000 480000
Less: Variable cost of sales 422400 210600
Direct material 150000 84000
Direct labour 180000 84000
Variable production overhead 120000 56000
Variable selling overhead 9200 6400
Less: Closing stock 36800 19800
Contribution 405600 269400
Less Fixed cost 354000 194000
Production 300000 140000
Non-production cost 54000 54000
Profit 51600 75400
The above income statements expresses that profits of the company are changing with
change in process applied on it. Value of stock is also changing along with it by a great extent.
Profits are more under method of absorption costing as compared to process of marginal costing.
TASK 4
Evaluation of how management accounting is integrated within the organisation
The concept of management accounting is considered as a decision-making approach that
facilitates the organisation in enhancing its effectiveness as well as performance by allowing its
accounting managers in making business decisions on the basis of evaluating the cost along with
the issues of other business performance. The process is holistic by nature and is primarily
operated for the internal use within the organisation. Management accounting is a key that helps
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the organisation in contributing to continuous improvements with the help of development as
well as integration of the systems that are related to the cost management.
TASK 5
The benefits of the function to the organisation
The process of management accounting provides several benefits to the organisation and
some of them are discussed as follows:
 Decision-making: It is considered as the most significant advantage of management
accounting as in this form of accounting different techniques are used by the accounting
managers from all the sectors such as economics, costing, statistics and many more. This
process offers tables, different analysis, charts and forecasts which makes the process of
decision-making more easier as well as justified.
 Planning: The concept of management accounting is ongoing and a continuous process
therefore, financial as well as other informations are represented to the management of
the organisation at regular intervals such as weekly, monthly and even daily. This helps
the managers of the respective company in planning day to day business activities.
 Identifying business problem areas: Management accounting can facilitates the
managers of the organisation in recognising the underlying cause of those issues that are
not performing well. Diligent management and its related information can identify the
problems in a very quick manner.
TASK 6
CONCLUSION
From above discussion it is concluded that management accounting helps in management
of activities of a business to reach out to the targets of organisation. Accounts as well as reports
are prepared in management accounting system. It helps in giving timely as well as accurate
information to business. In present report, several types of management accounting systems are
discussed that helps company to get success throughout its life. Income statement of company
shows that profits are more under absorption costing as comparing to marginal costing.
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PART 2
TASK 1
Benefits and drawbacks of different types of planning tools that are used to budget control
Planning tool is used for estimating budget and for having control over functioning of
business. Olde English Sheepskin Limited use this tool to limit risks in operations of company
and make financial statements of company more effective (Kumarasiri, J., 2017). These tools
helps company in planning, managing and forecasting the budgets of business which ensures that
targets of business can be completed and fulfilled by markets. There are several planning tools
that facilitates management of enterprise in providing relevant information and some of these are
mentioned below:
Variance Analysis:
It is the quantitative research of difference between standard and actual behaviour.
Variance Analysis helps respected company in maintaining control over the business activities
like manufacturing of clothes and their packaging by researching the areas in which functioning
of operations is poor. With the help of this analysis, actual budgets are compared with standard
budgets and variance between these budgets is evaluated. After that managers make an analysis
to identify the reason for such variance.
 Advantage: This analysis facilitates in meeting the targets of an organisation in an
effective way (Schaltegger, S., 2020). It provides assistance to existing company in
finding and justifying the risks generated within it and helps in developing trustful
relationship among members of the team for delivering planning information.
 Disadvantage: Variance Analysis is a costly and complicated process and increases the
cost of company. Calculation of variances along with research and reports becomes a
lengthy process and waste a lot of time of human resources of respected company.
Zero-based budget:
It is a method in which all operating expenditures of a defined period are justified and
must be approved for each new period. Human resources of Olde English Sheepskin Limited use
zero-based budget for evaluating and examining all expenditures for each budgeting cycle.
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 Advantage: It helps employees in finding better ways of functioning and managers
drives coordination as well as communication throughout company that helps them in
identifying better functioning in organisation.
 Disadvantage: It is very time consuming process and creates a lot of paperwork.
Managers of existing company observes that this process takes too much time and is very
lengthy than traditional process.
Responsibility accounting:
This planning tool of management accounting is responsible for budgeting, management
and all internal accounting of an organisation. Core objective of this type of accounting is to
facilitate all costing, planning and accountable centres within a company . In this accounting
system, responsibility is assigned to human resources of Olde English Sheepskin Limited to
control the costs (Hemmer, T. and Labro, E., 2017). Appropriate authority is assigned to
manpower of current company and they will be personally responsible for the risks occurred in
future.
 Advantage: Within this tool, responsibility is assigned to workforce of respected
company which helps in improving the performance of an individual. Collection of data
regarding costs and revenues is conducted under this accounting system which is used to
plan future costs and revenues by fixing the standards so that budget can be prepared
easily.
 Disadvantage: This system needs highly skilled human resources which rises the cost of
company. Within present company, sometimes a situation of clash is occurred between
goals and personnel of company which affects objectives in negative way as when goals
are not clearly defined to employees of company, they will not be able to achieve the
targets effectively.
TASK 2
Comparing systems of management accounting and adressing financial problems:
Financial problem is a condition when company is not able to reach out to its objectives
or facing any complexity while meeting its goals due to scarcity of resources or inappropriate
financial funds. Olde English Sheepskin Limited is facing some complexities in achieving the
objectives because of some complications (Nishimura, A., 2019). The financial problems faced
by respective company are described as under:
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 Higher cost: The organisation is facing an issue of excessive cost and because of that the
company is dealing with the problem in maintaining the profitability level. At the time of
manufacturing clothes and garments, business is facing that direct costs such as material
cost, labour cost, overhead charges are incurred at an excessive cost. This results in
declining the level of profits as more additional cost leads to diminish the volume of sales
and hence, profit margin.
 Mismanaged inventory: Poorly managed inventory such as raw materials like fabrics
and yarn causes inefficiency in business. It rises the risk of mistakes while doing reorder
of services from distributors. Inventory mismanagement reduces function's potentiality of
company and therefore, becomes a threat within the organisation.
Techniques to solve financial problems:
 Key Performance Indicator: Complexity of higher cost of manufacturing apparels can
be solved by KPI's of business as this process provides assistance to improve the
economical performance as well as making sustainable profits in Olde English Sheepskin
Limited. Excessive cost while manufacturing clothes and in their packaging can be
monitored by KPI. Because it facilitates the company in changing the track of its
attention where it is facing problem so that administration of company concentrate on
those parts to limit the problems that are faced b y company.
 Benchmarking: It is a set standard which helps in comparing the real performance with
the set standards to achieve the goals of the organisation in a more effective way. The
issue of mismanaged inventory can be solved out by the method of benchmarking. As it
helps superiors of the respected company in comparing the real performance of its
employees and company as a whole with their standard performance. It helps them in
identifying where stocks of garments and raw materials are mismanaged as well as helps
them to overcome from their complexities.
Comparison:
Basis Olde English Sheepskin Limited Synergy Manufacturing Co. Ltd
Financial problem Within enterprise, managers of
company are facing problem of
mismanagement of inventory.
Stock of apparels are mismanaged
In Synergy, prices of products are
not set up accurately and hence,
managers of company are facing
problem in attaining profitability
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within the company and are
causing inefficiency in business.
level of company. Because
inaccuracy in pricing strategy
affects functioning of business.
Management
accounting method
used
The respective business is using
inventory management system
The respective organisation is
following Price Optimisation
system.
Application of
system
By making use of this method,
managers of organisation control
the costs by making stock report
analysis of company's inventory. It
helps them in tracking the stock of
garments and raw materials within
the company.
By using this method, managers of
company can easily set the prices
of their products as this method
helps them in determining how
clients respond to different prices
of their goods or services through
several distribution channels.
From the above explanation, we can analyse that administration of Olde English
Sheepskin Limited will solve the problem of mismanagement of inventory by inventory
management system (Zarzycka and et.al, 2017). By making use of this method, company track
the stock of clothes within company by making a record of it. This type of process provides
assistance to run business operations in an effective and efficient manner so that there is
sustainability of profits in the company. The issue of highere cost will be solved by cost
accounting method. With the help of this method, managers of company determines the cost of
clothes manufactured so that they can judge company's viability.
TASK 3
CONCLUSION
From above explanation of the report, it has been concluded that planning tools of
management accounting provide assistance to the managers of the organisation in effective
forecasting, elimination of the risks and systematic as well as strategic planning. This facilitates
in assuring that business objectives as well as aims would be achieved and all the financial
problems would be eliminated at the initial stage. Within this existing report, different planning
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tools helps the respective company in controlling the budgetary system of enterprise. Financial
problems of company are addressed through inventory management system and cost accounting
method.
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REFERENCES
Books and Journals
Aouni and et.al, 2017. Goal programming model for management accounting and auditing: a
new typology. Annals of Operations Research. 251(1-2). pp.41-54.
Christensen, B. and Himme, A., 2017. Improving environmental management accounting: how
to use statistics to better determine energy consumption. Journal of Management
Control. 28(2). pp.227-243.
Fleischman and et.al, 2017. An exploratory examination of management accounting service and
information quality. Journal of Management Accounting Research. 29(2). pp.11-31.
Fleischman and et.al, 2017. An exploratory investigation of management accounting service
quality dimensions using servqual and servperf. In Advances in Management
Accounting. Emerald Publishing Limited.
Hemmer, T. and Labro, E., 2017. Management Accounting and Operations Management. In The
Routledge Companion to Production and Operations Management (pp. 345-359).
Routledge.
Jarwal, C. S., 2018. Management Accounting: A Tool to Achieve Entrepreneurial Goals. IUP
Journal of Accounting Research & Audit Practices. 17(4).
Kumarasiri, J., 2017. Stakeholder pressure on carbon emissions: strategies and the use of
management accounting. Australasian Journal of Environmental Management. 24(4).
pp.339-354.
Nik Abdullah, N. H., 2018. The influence of dynamic capabilities on strategic management
accounting practices and its effect on value creation in Government Linked Companies.
Nishimura, A., 2019. Enterprise governance and management accounting from the viewpoint of
feed-forward control. In Management, uncertainty, and accounting (pp. 31-50).
Palgrave Macmillan, Singapore.
Phornlaphatrachakorn, K., 2019. Influences of strategic management accounting on firm
profitability of information and communication technology businesses in Thailand.
International Journal of Business Excellence. 17(2). pp.131-153.
Schaltegger, S., 2020. Unsustainability as a key source of epi-and pandemics: conclusions for
sustainability and ecosystems accounting. Journal of Accounting & Organizational
Change.
Zarzycka and et.al, 2017. The perceived suitability of management accounting information: a
contingency based investigation. The Audit Financiar Journal. 15(147). pp.395-395.
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APPENDIX
Olde English Sheepskin Limited manufactures Product A and Product B. The following
information is available for April 2021.
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