Management Accounting: Principles, Role, Calculations, and Integration within the Organization

This study provides detailed information about management accounting principles, its role, and how it is integrated within the organization. It also includes calculations for income statement using marginal and absorption costing and different types of planning tools with their advantages and disadvantages.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
TASK 1............................................................................................................................................3
Principles of management accounting........................................................................................3
Role of management accounting and management accounting system......................................4
Calculations for an income statement using Marginal and Absorption costing..........................7
Evaluating how management accounting is integrated within the organization.........................9
CONCLUSION................................................................................................................................9
TASK 2..........................................................................................................................................11
Different types of Planning tools and its advantages and disadvantages..................................11
Effectiveness of management accounting in dealing with financial problems.........................13
CONCLUSION .............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management accounting is the systematic process which is maintained by the company in
order to prepare reports about business transactions that help them to make strategic decisions.
The present study will provide detailed information about medium-sized organization, John
Good shipping, logistics firm in UK. The company allows their customers to interact directly
with its business system as they have invested in the upgraded shipping technology. In addition
to that, the report will provide information about principles of management account and its role.
Along with that, the study will calculate income statement using variable costing to support
business operations and its progress. Furthermore, the study will give information about benefits
of the function to the company and comparison analysis with the help of benchmarking and key
performance indicators to prevent financial problems. At last, the study will provide advantage
and disadvantages of various planning tools such as zero base budgeting and others.
TASK 1
Principles of management accounting
Management accounting plays a vital role in running business smoothly because it helps
managers of the company to track expenditures and income, provide detailed information about
business transaction so that they can make strategic decisions about business. Proper
management accounting is necessary to provide information to investors about business
transactions so that they can make decisions about financial transactions and investment
decisions.
The company used this method to find out the financial position so that managers and top
management team can make decisions on the basis of relevant data (Maheshwari, Maheshwari
and Maheshwari, 2021). The system of management accounting can provide different methods
and techniques to control the costs and budgets. The main objective and goal of the management
accounting is to avoid errors and mistakes which can be harmful for the company's performance.
1. Designing and compiling.
The principle of management accounting says that it is necessary for company to
maintain accounting reports, business transaction and other related information. It should be
designed in a proper way to meet organizational goals and deal with business issues. The

management accounting system and approaches should be compiled very systematically with the
help of relevant data based on the previous information.
2. Control at source Accounting.
This system is helpful to control costs of products and services which are incurred during
the business transactions (Principles of management accounting, 2021). For example- detailed
information about materials, power, repairs and maintenance and others.
3. Accounting for inflation.
The principles of management accounting says that it is necessary to maintain capital
which is contributed by the owner of the company concern in terms of real money through the
revaluation accounting method (Weetman, 2019). So, the firm must take rate of inflation into
consideration in order to judge the progress of the business.
4. Management by Exception
When the manager of company present important information to top-level management
team, they can easily find out the deviations. In other words, budgetary control in the firm and
standard costing method are followed in the system. Therefore, in this way the actual
performance of the company is compared with the previous data. Also, if the things are going
wrong, the unfavourable deviations are being informed by the team to managers so that more
action can be taken if necessary.
Role of management accounting and management accounting system
The major role of management accounting is to keep record about business transactions
so that managers can make budgeting decisions, planning about business and other important
decisions such as investment, risk management and cost control (Abdusalomova, 2019). It will
help the management of the company to perform all its business functions such as organizing,
staffing, controlling and directing. The managers of john good shipping make important
decisions, with the help of management system such as recording of business transactions,
planning for future goals and risk management. For example- it will provide information about
relevant cost analysis and expenses so that managers can advice beneficial suggestions for future
business activities to their employees.
Different types of management accounting system
Cost accounting system- This is the method used by company in order to estimate the
product cost for profitability analysis. By adopting this framework the manager of the company

can also estimate the cost control system and inventory valuation. It is the system which
comprises a controls and processes with respect to business that are designed by company to
report in order to manage cost.
Benefits- The major advantage of this method includes it helps the company to lower their
product cost by identifying the relevant items related to business. By adopting this method, the
company can achieve profit maximization which is beneficial for overall performance.
Drawbacks- The disadvantage of this method arise only if the management accounting system is
not applied with care. It is a very costly method because double set of books of accounts has to
be maintained which needs time and efforts both. While doing installation, this method required
good finance and sometimes results are misleading which can impact the efficiency of the
business.
Job costing system-It is the systematic process of providing information about the
product cost which is associated with a specific service job. This method must be able to keep
track on the cost of materials in the company that are being utilize during the job.
Benefits- By adopting this method, the firm can monitor the product cost throughout the
manufacturing process which can be beneficial for them to make important decisions. This
method provides analysis of overhead, labour and raw materials for each job. It will be helpful
because it can easily keep track on all expenses done by the firm on regular basis.
Drawbacks- this method can create conflict between employees because of overload paperwork
as the overheads cannot be controlled.
Inventory management system- The management accounting system says that this
method is used by company so that they can keep track on the goods throughout their entire
supply chain. This method gives detailed information about inventory, stock and other
approaches in the business operations (Pavlatos and Kostakis, 2018). The process provides areal
time view of the inventory across all the selling channels in the firm. John good shipping used
the effective method named as ERP method of inventory management which is also known as
enterprise resources planning. This method allows managers to manage all the business
transactions and activities such as logistics, financial transactions and planning of business
activities.
Benefits- The major benefit of using this method, it helps to manage multiple locations and
stocks outs. The method keeps a proper track on stocks in order to reduce risk of overselling and

to control unnecessary expenditure. This is the systematic method which is helpful to improve
business negotiation for cost savings while making inventory related important decisions. It is
helpful to minimize the stock outs and excess stock in order to simplify the inventory control
system .
Drawbacks – This method is expensive in nature and show limited elimination of risk in the
business activities.
Price optimization system- This method of management accounting gives detailed
understanding about how much business the firm obtain within profitability levels on the basis of
how sensitive their customers are to changes in product price. It is the mathematical process that
can be used by company to calculate about the demand of the goods at various prices (Bhimani,
2020). John Good shipping team combine the important data with inventory levels in order to
suggest the product price that will increase profitability.
Benefits- Nowadays, customers are more attracted towards products with reasonable price and
low cost. They pick up on products when they feel priced optimally so, the company use this
method to maximize the profits and sales., It will ultimately increase the revenue.
Drawbacks- This is the method which requires rapid reaction to alterations amongst the
competition, hence its is time exposure process.
Different methods used for management accounting Report
Cost accounting Report- This method includes information of provider such as data
utilization and cost by centre. It is helpful to keep customer informed and help them to control
costs. The company maintains this report to determine the cost per equivalent unit in the given
project. Unnecessary expenses and profit earning are estimated with the help of cost accounting
report.
Budgeting Report- Budget report play a vital role in management accounting because
this report helps business and managers of the company to understand the overall business
activities across different departments. By evaluating the expenses and income in previous years,
this report will help to estimate budgets for the following year. It will provide solution to cut
costs if necessary with respect to business. This report is also maintained to provide incentives to
employees , this step will motivate them to achieve success.
Accounts receivable Ageing report- This is one of the most important report for any
business as it provides an information about credit balances. With the help of this report

company can adjust credit policies to align them with clients payment capabilities. John good
shipping mangers maintains this report in order to find the invoice balance which is unpaid with
the time period. It keeps proper track on slow paying clients and used to attain detailed analysis
of problem associated with company's collection process.
Performance report- This report is maintained by the firm which shows overall
departmental reports to make strategic decisions. An organization keeps an accurate measure of
its financial strategy. In addition, this report will compare actual results to a budgetary statements
so that company can take action when there is an unfavourable situation. To attain the most
effective financial decision it is necessary to have authentic managerial accounting performance
report.
Calculations for an income statement using Marginal and Absorption costing
Marginal costing- when the fixed cost are considered as the cost of the period and
variable costs are considered as the product cost then it is known as marginal costing. The
treatment of fixed production overheads is the major reason behind the different profit figures
calculated under marginal and absorption costing. Here, the full amount of fixed production
overheads is being written off. This method is more useful in profit planning, which means if the
company wants to determine profitability at different level of sale then marginal costing is best.
A firm can make decision about selling price and buying decision.
Absorption costing- This is the method of management accounting for capturing all costs
of products or services associated with manufacturing a particular good. Indirect and direct costs
such as labor, raw material and insurance are accounted for by adopting this method. The major
advantages of using this method is to ensure more accurate accounting for inventory this is just
because the expenditure associated with ending inventory are directly linked to the full cost.
Marginal costing
particular Amount Amount

sales 100000
Less: variable cost
Raw material cost 25000
Direct labour cost 14000
Variable manufacturing overhead 9000
Variable distribution and administration
expenses 4500 52500
Contribution 47500
Less: fixed cost
Fixed manufacturing overhead 7000
Fixed dis. And admin. Expenses 5000 12000
profit 35500
Absorption costing
particular Amount Amount
sales 100000
Less: direct expenses
Raw material cost 25000
Direct labour cost 14000
Variable manufacturing overhead 9000
Fixed manufacturing overhead 7000 55000
Contribution 45000
Less: indirect expenses
Variable distribution and administration
expenses 4500
Fixed dis. And admin. Expenses 5000 9500

profit 35500
From the above calculations the following rules can be made out such as:
The profit under marginal and absorption costing will be the same because there are no closing
and opening stocks. The above statement shows that the company make profit of 35500 and
make sales of 100000. As a matter of fact, the company contribution in marginal costing is
47500 while in absorption costing contribution shows the amount of 45000.
From the above discussion, it has been evaluated that absorption costing is a better method. But
if in case, the company is start up business and the major purpose is to take a look into
contribution per unit and break even analysis then marginal costing method will be helpful.
Evaluating how management accounting is integrated within the organization.
Management accounting is helpful for managers to make business related decisions with
the help of budgeting in order to reduce the unnecessary expenses. This system compare the
actual budget to actual expenses done by the firm in order to evaluate the financial information
(Azudin and Mansor, 2018). Managerial accountants in the firm support decision-making
process by providing and offering a financial information with the help of tools and software.
Manager of John good shipping use management accounting method so that they can
make short term and long term decisions which includes financial position and market place of
the firm (Why management accounting is important for decision-making, 2021). This system
helps them to make operational and investment related decisions in order to develop the
operational efficiency of the firm. To ensure the consistency once the process of management
accounting is adopted, hence it has to be attained as an organizational culture.
Management accounting system influences the operational decisions and thus can be
considered as one of the most important management aspects that shape the overall business and
entire firm. For example- In order to sustain the organizational culture of management
accounting, the managers or accountants have to attend strategic meetings in which planning and
policies can be made. The policies should cover all the important aspects such as management
accounting function and the scope, roles within the company. The management accounting
system provides detailed information about cash inflows-outflows, so that manager can evaluate

the financial health of the company (Amara and Benelifa, 2017). This method measures what is
beneficial for the company and detect errors to form long term strategies to make effective
production and budget related decision.
CONCLUSION
To conclude, management accounting system is a decision-making method used by the
firm in order to increase the value by allowing its managers and top leaders to make operational
decisions based on costs evaluation and other performance related issues. By evaluating the
report it has been concluded that management accounting system mainly performed for internal
use so that effective decisions can be made.
Furthermore, it has summarized that company maintains cash flow statements, capital
statements and market research in brief in order to understand the financial health. Along with
this, the report concluded that management accounting reports such as cost accounting report,
performance report and budget report are being prepared for measuring the overall performance,
so that necessary changes can be done. At last, the report has provided information about
managerial accounting report which offers information regarding profitability, market factors
and overall performance include team performance.

TASK 2
Different types of Planning tools and its advantages and disadvantages
Cash budget- The cash budget is one of the most important planning tools used by
company to make short term financial decision for cash inflows-outflows. It is the management
tool used by firm to manage cash so that managers can plan and control the use of money. With
the help of this tool, unnecessary expenses can be reduced which is beneficial for company's
profitability. There are different methods to prepare a cash budget which includes payment and
receipt method, balance sheet and cash flow statement.
Purpose- The major purpose of this budget is to assess any long term borrowing needs of the
business. Basically, it is well-known for the management decisions which is needed to make
short term business borrowing during operation cycle. It is noted that long term cash budgeting
requires more time and strategic planning. It will forecast ending cash balance and used by
company to plan things such as funds availability in order to invest.
Advantages- when the company is using a cash budget effectively, then they will become more
resourceful. It is possible that they might find various ways to save cash, which means they need
to eliminate all the unnecessary expenses or waste from budget (Kamau and Mungai, 2020). For
example- John good shipping team find that when they are watching every single penny spent
and earn by them or cash inflows-outflows they can easily control spending and find new
techniques of growth and development.
Another benefit of cash budget includes, when the company operates this budget, then
they can quickly determine if they have enough cash to meet the organizational goals. If not, then
it is necessary to make proper action and use effective techniques to ensure the budget estimates
can be met. Hence, it is said that cash budget can quickly identify potential deficits, if any issues
occur.
Disadvantages- Nowadays, people are more interested in online purchasing and have stopped
accepting cash for certain activities. For example- if the company only using cash budget and not
using online system then they may find it difficult to access some services which only requires

online payment. Hence, it is said that cash budget limits the spending power and impact overall
productivity.
Another drawback of cash budget includes, if people carry cash with them, there is a
chance they could misplace it or it can be stolen, therefore, it is said that cash is the easiest asset
to steal by someone. In other words, people cannot have access to it until they found it, hence,
losing cash will impact the budget. It is necessary to maintain cash budgeting properly so that
anyone can easily able to communicate financial position of the business.
Zero base budgeting- This method is used by company as a planning tool in which all
expenditure should be justified for each new period. In other words, the major purpose of zero
base budgeting is to eliminate unnecessary cost by looking at where expense can be cut down
(Hughes, 2020). For example- john good shipping used this budget in order to achieve strategic
goals which requires company to build their annual budget. This budget develops a new
approach every time that is starting from zero.
Purpose- one of the important aim of this budget is to justify expenses and money spent and also
aims to drive value for the company by optimizing the cost of any product or service.
Advantages- The major advantage of this budget includes managers of the company can justify
all operating expenses and shows which areas are generating revenue. Here, they think about
how money is spent and where the cost can be cut.
Disadvantages- one of the major drawback of this budgeting, it takes a lot of effort and time to
review and justify every element of budget very closely. Sometimes it can lead to culture change
in the company where there is reduced spirit of cooperation, as employees feel expendable.
Activity based budgeting- This budget is a systematic tool used by company in order to
research, record and analysing the business activities that lead to company's costs. Here, budgets
are developed and improved on the basis of results. For example- company's business activities
or operations are analysed to predict costs in other words every activity is recorded to arrive at
current year budget.
Purpose- This budgeting is being carried out to bring efficiency in the business activities,
therefore budgets are prepared after the justification of cost drivers.
Advantages- The major advantages of this budget includes, here the unnecessary and irrelevant
business activities are eliminated and only the relevant business activities form a practice. Hence,

this leads to save its costs and increase the production of services and products at lower cost. It
will ultimately help the company to achieve their business goals easily in the market.
Disadvantages- This budget requires a lot of knowledge to understand various functional areas
of the business. So, manager of company needs to have deep understanding about different areas
of functions in order to achieve accurate budget preparation. Thus, this budget is also known as
complex budgeting as it requires more research of various factors. If the manager not preparing
this budget in a proper way then it would lead to inaccurate budget preparation.
Effectiveness of management accounting in dealing with financial problems
The financial problem is the adverse situation in which the company is not able to meet
the bills on time or cannot afford the basic needs of the organization. The financial problem is
caused due to limited money management skills and knowledge, personal issues of the company,
not having good financial decision-making or it may be caused due high debt level (Fitó Bertran,
Pla Erta and Llobet, 2018). An organization should manage the financial problems in order to
achieve dan increase the profitability of the business. There are different management accounting
systems in order to respond the financial problems that are as follows:
Benchmarking: Benchmarking is basically the continuous process in order to improve
the business organizations by describing the scope of the improvement, comparing the current
position with past conditions and the practise of the business related with the competitors (Holm,
2019). By having the good benchmarking the company can cope-up with the financial problems
and can achieve the planned targets and goals. There are two types of benchmarking that is
internal benchmarking and external benchmarking.
Advantages- 1. It give the ideas in order have the best learning experience foe the
organizations.
2. By using this strategy the organization can know about the new and innovative
technology and techniques in order to remove financial problems.
3. By adopting this method the company can improve its standards from its
competitors.
Disadvantages- 1. By using this method it is difficult for company to gather the
information.
2. Sometimes the organization can have the irrelevant comparison by using this
strategy.

3. It creates the lack of understanding in the company.
Key Performance Indicators: Key performance indicators are the quantifiable measure
of the performance of the company in order to check the objectives of the company. This makes
the company to have the targets by not having any financial problems in the organization (Lü and
Chen, 2021). The KPI supports the strategy of the business and make them to focus on the
objectives and aims of the organization.
Advantages- 1. The KPI helps the company to recognize the gaps and fill those gaps
which are creating problems.
2. It empowers the employees to take the decision and actions.
3. It is the best way to measure the outcomes and results of the company and mange
the financial problems.
Disadvantages- 1. The KPI needs time in order to be had the successful organization.
2. Measuring and analysing the performance of the organization can be so
expensive.
3. This method of accounting is short-term oriented as it might be difficult for
company to achieve its long term objectives.
Variance analysis: Variance analysis can be defined as the difference between planned
numbers and the actual numbers. The total sum of all variances shows the overall performance of
the company (Dai and et.al., 2021). This makes the company to overcome with it financial
problems and makes the company to achieve its aims and objectives. By analysing the variances
the company can find out the problem and improve the performance of the company.
Advantages- 1. The variance analysis is the best tool to assess the manager's
performance.
2. There is great care when the variance analysis is used for responsibility
accounting.
3. It makes the managers to have the smart and accurate budget (Zhuo, Shao and
Yang, 2018).
Disadvantages- 1. It has non standardized production.
2. The variance analysis is difficult to use in service organizations.
3. This process is lengthy and causes delay in reporting.

Balance Scorecard: The balanced scorecard is basically the performance metric of the
strategic management which helps the organization to identify the internal operations in order to
have the external outcomes. It measures the data of the past performances and provides the best
feedbacks to the company to have the better decisions in the future. It is more focused in order to
focus on the performance against objectives (Malagueño Lopez-Valeiras and Gomez-Conde,
2018.). It is used to provide the feedback on the internal and external outcomes of the company.
Advantages- 1. This method helps to bring the best structure to business strategy by
having the good feedback.
2. It makes the communication easier in the department by taking reviews from the
members in the organization.
3. It makes the individual worker to work with the organizational goals.
Disadvantages- 1. This is customized so it is difficult to understand one process of using
this method.
2. This method get complicated as it requires lots of time to use this.
3. This method requires lots of data as it needs feedbacks and reviews of the people.
Comparing the taken company with its competitor:
John Good Shipping Streamline shipping group
The company use the benchmarking method
because it makes the organization to check the
current conditions with the and makes them to
have the good practices in order to compete in
the market. By using this method it helps the
company to cope-up with the financial
problems.
The organization uses the balance scorecard
because it makes the company to have the
feedback and take reviews in order to work and
make further decisions. This method makes the
individual to work with company's set goals.
Recommendations- By evaluating the study, It is recommended to improve company's
profitability by putting cut-off policies in business place. The firm needs to focus on eliminating
unnecessary cost, expenses and inventory or any business activities which is irrelevant in nature.
This is the only way to improve profits and save company's costs. The managers need to focus
on activity based budgeting while preparing it because this budget requires a lot of understanding
and knowledge. In other words, it is advisable to improve cash management which help a

company become more profitable, with this company can gain competitive advantages. The
another way to improve the management accounting skills is to focus on effective
communication so that employees can work together. This is the key towards truly improving
and developing company's management skills. In this way, company can easily make their
market position by adopting various planning tools, effective marketing strategies and others.
CONCLUSION
From the above study of the report it is concluded the three planning tools that are used in
management accounting that are related to budgetary control which are cash budget, zero based
budgeting and activity based budgeting with its advantages and disadvantages. Further this report
concludes the meaning of the financial problems and describes the different types of
management accounting system in order to respond the financial system that are benchmarking,
key performance indicators, variance analysis and balance scorecard with its advantages and
disadvantages and it also describes the comparison between the companies using different
methods to respond the financial problem. At last this report evaluates the recommendations to
problems of the organization.

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