Management Accounting: Principles, Role, Cost Calculations, Benefits, and Planning Tools

This article discusses the principles of management accounting, its role in organizations, cost calculations using marginal and absorption costing methods, benefits to the organization, and three planning tools. The article also includes a case study of Hammond Electronics and its use of management accounting. Subject: Management Accounting, Course Code: Not mentioned, Course Name: Not mentioned, College/University: Not mentioned.

Management
accounting

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. An explanation of the principles of management accounting: ...............................................3
2. The role of management accounting and management accounting systems:.........................4
3. Costs calculations using marginal and absorption costing methods:.......................................5
4. Management accounting whining organisation.......................................................................7
5. The benefits of management accounting functions to the organisation: ................................8
6. Concluding on the reflection on the application by applying management accounting..........9
PART 2............................................................................................................................................9
1. Comparing and Explaining three planning tools for management accounting .......................9
2. Comparing about the adaptation and the application to the management accounting and the
evaluation of the effectiveness in dealing the financial problems.............................................11
3. Recommendation...................................................................................................................13
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is the method and concept that is necessary for effectiveness in
the management activities and to determine which all alternatives are to be chosen among the
given ones. The concept makes it easier for the managers to make relevant and prompt financial
for the smooth overall business operations in the global market. The principles of management
accounting act as a guide in identifying the data of past, present as well as the future. All the data
is obtained from both internal and external sources in order to ensure success.
Hammond Electronics is a leading manufacturer in the global market of electronic and
industrial equipment. The firm can make an effective use of management accounting and its
principles to assure its operational activities with the formed strategies. Therefore, this particular
brief will include an understanding of how the management accounting and its principles work
and what are various techniques involved. Further, it will be mentioned that how can these
benefit the organization in business growth and success. Also, the planning tools used in the
process will be evaluated and compared using specific case studies in dealing with the financial
crises.
MAIN BODY
1. An explanation of the principles of management accounting:
Management accounting has numerous branches under which there are many departments
that determine and analyse the data and information necessary to carry out its overall business
operations carefully without any hindrance to the financial stability of the firm (Gunarathne. and
et.al., 2021). One such branch is the principles of management accounting that help in the
formation of effective and efficient business strategies.
1. Designing and Compiling:
This principle states that all the accounting information, records, statements need to be
stored and compiled together for future reference and evidence to meet the demand of a
particular situation at the time of crisis. It also states that the main aim of management
accounting is to design solutions in a way that can solve all the problems to ensure success.
2. Management by exception:
This principle of exception is followed when a particular information has to be presented
in front of the management to compare the actual performance with the pre determined ones to

find out the differences between them. The management takes into account the deviations
encountered, so that quick actions can be taken to preserve the specific resources in hand.
3. Return on Investment:
The return on investment is also known as the return on capital employed because it
determines the efficiency levels of a business and the investment made is calculated on the basis
of real money value (Oyewo. 2021). This particular principle allows an effective range of
investors who are willing to invest their money in the business and those investors have the
rights to compare different investment options available to them.
4. Absorption of Overhead Costs:
This particular principle states that the overhead costs can be absorbed by anyone on the
basis of pre determined analysis and are the combination of indirect expenses and materials
found in the resources of any business. Hence, there should be one or more than one selected
method that can ease down the process of absorption of the overheads and can assists in bringing
about the desires results in the most unbiased manner.
5. Utilization of the resources:
This principle states that there should be an effective utilization of the resources because
of lack of their availability in the dynamic world. The availability and scarcity of resources
depend upon the situations of the real world, hence, the business firm should always ensure
proper and careful utilisation of the resources available with them keeping in mind the need and
demand of the customer.
2. The role of management accounting and management accounting systems:
In today's competitive world, where all the business and marketing firms are striving to
attain and achieve the desired competitive advantage and position, it is necessary for each one of
them to make right and accurate decisions that will help and assist them in assuring their
financial position and stability. For this purpose, management accounting systems provide and
leads the way towards accurate and relevant information that is useful for the smooth and secure
carrying out of overall business opportunities. To formulate effective business strategies and
financial statements, management accounting and its systems help in the analysation of the data
and information that can be proved out to be of a great essence (Dahal. 2019). After analysing,
the task becomes to compare the data and information of the past and present years in order to
mark differences which will be useful for the organizations to form effective strategies. Apart

from these, management accounting deals with the controlling function within and outside of the
organization to help prevent unnecessary financial and non financial activities. By conducting
such control measures for the organization, the systems ensure and evaluate the overall
organizational performance and continue to interpret the deviations, thus, found.
3. Costs calculations using marginal and absorption costing methods:
The statements of financial performance of “Hammond Electronics” are as-
Marginal costing-
Marginal costing method believes that only variable costs must be deducted form the revenue
generated form sales and fixed cost must be charged against contribution. This is the reason that
while computing the per unit cost or cost of the stock, a significant variance can be observed
(Nan, 2019)
The marginal costs of the organizations are as-
Particulars Amount
Sales for the year $148000
Less: Variable cost
for the year
COGS(cost of
goods sold)
$90000
Goods selling and
distribution cost
$31000
Total variable cost $121000
Contribution $27000
Less: Fixed cost for
the year
$10000
Net profit for the
year
$17000

Net profit for the organizations using the absorption costing method:
This is the method where both fixed and variable costs are absorbed against the revenue
generated form sales (Hojna and Stryckova, 2018) Since it keeps the notion that for proper
valuation of goods and profit, there is need to take all relevant costs into consideration. The
profit and loss statement using absorption costing is as-
Particulars amount
Sales $148000
Less: Cost of goods
sold
$90000
Gross profit $58000
Less: Indirect
expenses
Administrative cost $5000
Research and
development cost
$350
Selling and distribution
cost
$32000
Loss on sale of
property
$10
Lease charges $700
Interest expenses $7060
Other indirect
expenses
$8000
Total fixed expenses $42000
Net profit for the year $17000

On the basis of the above calculations the per unit cost can be calculated as-
Marginal costing Absorption costing
Variable cost $121000 $121000
Fixed cost $42000
Products cost $121000 $163000
Per unit cost= Total product cost/ number of units
From marginal costing method= 121000/1000= 121
Absorption costing= 163000/1000= 163.
from the statements above it can be summarized that the both methods are having their
great significance when it comes to costing. The methods are distinct in nature in term of their
practises and the way they are reverting outcomes. As it is being experienced that by using the
marginal method, per unit cost has been 121 at the same time, by using absorption costing the
per unit cost has been 163.
The marginal costing is the method where only variable costs are charged against the
total revenue generated by sales. This is the reason that per unit cost is lower, because fixed cost
factor is not taken into account while making computation. On the other hands, the absorption
costing method is quite different since in this method, both variable and fixed costs are changed
against the sales revenue. In this predicament, there would be difference between the per unit
cost (Hamamura, 2018)
The above articulated income statements are showing cost and income structure of the
organization in both different costing methods. Form the statements it can be analysed that the
key reason of the difference between the profits is cost treatments. The methods are not treating
costs in equal manner and that's the reason behind this variance in profit for the year.
4. Management accounting whining organisation
The company Hammond electronics mainly engaged in the manufacturing activities and
working to attain the profits and success while operating the dynamic market.
The company is mainly working and established from the 1934, While working as for producing
the different range of products to the consumers including the plastic, diecast industrial
enclosures also the general purpose used metals in the dynamic market. As with changing the

times wit the technology and more inclining of the procedures for making the progress the
company adopting management accounting will help in being more productive with installing the
strong management working with using different practices (Alabdullah, 2019). As due to the
changing times facing various new process due to advancement which influences the decisions in
the company.
Thus, with the advancement and the dynamic market conditions the company adopting
management accounting which helps in practising all the modern techniques which helps in
being more updates and taking the decisions by being more fair to manage all the business
transactions for defining the profits and the deficits being faced while operating the electrical
business.
5. The benefits of management accounting functions to the organization:
The functions of management accounting prevails in the overall business operations of a
firm and same goes with Hammond Electronics. The firm is majorly known for its
manufacturing activities of producing electronic and power appliances that are supplied across
the globe with numerous customers in its cabinet. Such businesses require the most powerful
decision-making strategies that can help and assist them in the planning and organization of the
strategic management problems that impose huge risk to their operational activities as a whole. It
also benefits the firm in the form of estimation of cash and cash equivalents and the impact these
have on their business (Le. and et.al., 2020). These also help in the determination of the
essentiality of its presence as to conclude whether these are required in any of the department for
any purpose. These estimations allow the businesses to better understand the variances they are
facing in the overall performance using the analytical techniques. When such deviations and
variances are interpreted, it helps the firm to increase the rate of return which has demanded a lot
of investment rates. If the firm keeps everything in mind about the management accounting
functions and make use of all the techniques available, it will become very easy for them to
attract more external and internal aspects who will help them to achieve the overall business
objectives.
With using the management accounting it mainly helps in accounting and being able to make
progress in the business:
 With adopting this function in the business it mainly helps in working and attaining
greater efficiency by planning effectively to attain the success in the organization.

 With using this function it manly helps in defining the hindrances to attain the set
business directions in the company.
 The more important function in the company as to attain success by complying all the
resources with the finances and making the superior business functions.
 With this the Hammond business is mainly engaged with manufacturing working it
mainly companies to attain the set objectives by tracing all the actions being taken with
covering all is investments.
6. Concluding on the reflection on the application by applying management accounting
From all the above discussion is being concluded that, management accounting is being
used by the business to carry out the earning and measuring the surplus and business deficits.
Various benefits attained by the business and it influences and derived the decision-making
process in the business to attain the set established objectives. But for installing the management
accounting process and the practices it mainly required high investments for working and
installing the set procedure. As for adapting this tool in the Hammond electronics it is expensive
and regarded as luxury tool for the business (Pelz, 2019). In the company as most of the
decisions is mainly impacted by the external factors which impacts its decision-making
processes. Thus, with effective applying the management accounting in the company helps in
leading the manufacturing business and lead to attain greater heights. Also with applying the
management accounting in the company mainly helps in leading the business to take better
decisions.
PART 2
1. Comparing and Explaining three planning tools for management accounting
Planning tools are mainly used which helps in defining and guiding the company to take
various ways as for implementing and addressing the problems which are being faced while
transacting the business. With using the three management accounting tools as:
Zero based budgeting
This tool in the management accounting is mainly defined as the process which helps in
allocating the funds on the basis of attaining efficiency which working. The main goal and the
objective of the company is to build the pan which helps in doing proper expenses by aligning
with the goals to be attained in the company by lowering the costings (Rikhardsson and

Yigitbasioglu, 2018). The budgets in this are usually created on the basis of analysing the needs
of monetary in nature for addressing the future circumstances. As by making these it helps in
managing the company by lowering the cost which results in better operations.
Advantages Disadvantage
This helps in emphasizing and taking improved
decision-making.
This mainly helps in attaining cost based
benefits.
By evaluating the ZBB it helps in attaining
competitiveness in the company.
It results in minimising and eliminating the
activities are irrelevant and not suitable for the
business.
By calculating this costing it helps the
company to efficient allocate the resources for
examining the profitability in the business
which helps in attaining the ultimate set
objectives.
By calculating cost method it impacts on the
long term goals of the business.
This tool is subjective and more complex in
nature.
Conflict in the management may arise while
calculating these cost as require the wide
efforts of the staff personnels working in the
company.
For calculating this cost it requires high costing
in the training and the expertise personnels for
calculating and adhering the ultimate zero
based budgets.
Activity based budgeting
This management accounting tool is mainly aid in analysing the business activities as for
ascertaining the costings in which they are mainly recorded, researched and being
analysed(Advantages and Disadvantages of Zero Based Budgeting.2022). With using this tool it
helps in predicting and evaluating the future costing in the business (Ngo, 2021). Thus, this is
mainly used for building and attaining efficiency by properly allocating the available resources
in all the business activities.
Advantages disadvantage
With calculating the activity based costing it
helps to build better relations between the
consumers and the company.
These budgets are no suitable for those in
which the companies have small overheads
than the operating costs.

With using this management accounting too it
helps in eliminating the hindrances and the
bottleneck being arisen by eliminating the
irrelevant activities in the business.
With calculating the activity based costing it
helps in attaining competency to the business.
With this tool it helps in identifying the
inefficient process which help in improving
and attaining the set targets.
It allocates the manufacturing overheads in the
company to all the product and the processes.
It is long and the comprehensive in nature
which results in consuming time and high
spending on resources.
Does only focuses on the short term results in
the business.
Cash budgets
With using this tool in the business it manly helps in estimating the inflow's ad outflows
of the business. With using this it helps in determining the earning by analysing the surplus and
the deficits attained in the business (Miller, 2021). As it mainly helps in forecasting the cash
availability by determining the revenues and the expenses being occurred.
Advantages Disadvantage
With making these budgets in the company it
helps in overcoming and reducing the
occurrence of the debts.
With doing and making the cash budgets it
helps in defining the earning as the surplus and
the deficits of the company in the particular
year.
With making the cash budget it mainly helps in
defining the earning and the financial positions
of the company while operating in the dynamic
market.
With making the cash budgets it impact in
adapting the new trend and changes.
Ii also results in creating the danger of theft as
it mainly tracks all the movement of the cash.
It also limit spending power of the company as
pertaining to the cash limits.

2. Comparing about the adaptation and the application to the management accounting and the
evaluation of the effectiveness in dealing the financial problems
With using different management accounting system which mainly helps in responding to
the financial problems:
Financial governance
With using this tool it mainly helps in managing the company financial performance and
all the transactions in the company (Jarad and Rashid, 2021). It mainly aims in defining all the
policy and processes which helps in managing the business data that it is correct of not for
attaining the best performance.
Advantages: With using this helps in measuring the errors being faced in the company which
helps in attaining growth by improving productivity while using this system.
Disadvantage: With this the uncertain business situations and the inaccurate data results in
hindering the business performance.
Balance scorecard
With using this tool in the business it helps in setting the strategic objectives in the
company (Kostyukova and et.al., 2018). This helps in identifying and improving the business by
controlling and measuring the strategic actions to attain success by obtaining better financial
resources in th company.
Advantages: With using this system it helps in removing all the financial problems as it helps in
better communicating and working with assured structure by aligning the goals to attain the set
business objectives.
Disadvantages: With using this in the business being rigid and complex in nature results in
complicating the process for evaluating the actual and the last outcome.
Variance analysis
This tool is mainly used as for planning the activities and helps in defining the planned
outcomes by measuring the deviations attained in the business (Bhimani, 2020). With measuring
the gap help in managing all the working as to attain low costing with assessing the pricing and
adopting the particular raw materials with giving the adequate wages to the labourers.
Advantages: with using this system in the firms, it helps in attaining and planning effectively for
the profits with managing all the working and finding the deviations by finding the inefficient
operations.

Disadvantages: For working and adapting this system for solving the financial business
problems it requires highly skills and the expertise professional, also in complex and time
consuming processes.
KPI'S
These are mainly defined as the indicators to the business which defining the growth
earning and the improvement in the strategies for attaining and working effective (Barnhill and
Rundio, 2021). With using this tool it helps in improving and making the strategic and the
operational process which helps in responding to all the financial problems.
Advantages: with using this system in the business it helps in attaining the best outcomes by
measuring the growth and the hindrances in attaining the business objectives.
Disadvantages: with using this tool and system in the Hammond, it decreases the ultimate
output by facing difficulty in communicating the areas.
3. Recommendation
The following suggestion is being given to the Hammond electronic which helps in
development and achieving the sustainable business success in the company are as follows:
 The company must adopt the variance analysis and the KPI which helps in improving the
business operations by making improvements in the company, thus results the Hammond
company to better and effective respond to the financial crises being faced with using kpi.
Also while adopting the variance analysis it results in attaining success by planning and
defining the actual and planned outcomes of the business which results in measuring the
ultimate success.
 The company must prepare the cash budget which mainly helps in estimating and finding
the inflows and outflows of the cash and earning the profits in th particular period of
time. This helps in finding the available financial resources which helps in attaining the
business stability with defining the deficits and the surplus being attained while working
in the dynamic business environment.
CONCLUSION
From the above report it can be concluded that management accoutring in the business
play important role which helps in recording al the financial transactions and as to attain the set
business objectives. In this report it has provided the detail about the different accounting tools
which are mainly used in the business. Analysing the Hammond electronics and defining their

marginal and the absorption costing which help in deriving the profits attained in the particular
year by the business. Further more, it also provides details about the cost by examining the
income statement of the company. Also evaluating the advantages and disadvantage of defining
the different planning tools which are used in the management accounting. Also defining the
different systems of management accounting which helps in responding to the financial problem
being faced. Lastly giving the recommendations which helps in ever-increasing and attaining
growth in the company by attaining profits by developing and managing the business accounts.

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