Management Accounting: Principles, Role, Cost Analysis, and Planning Tools

This report provides detailed information about management accounting, including principles, role, cost analysis techniques, and planning tools. It includes a case study of a medium-sized organization and provides recommendations for future business activities. The report highlights the importance of management accounting in making strategic decisions and controlling unnecessary expenses.

Management Accounting

TABLE OF CONTENTS
Introduction .....................................................................................................................................3
PART 1............................................................................................................................................3
1.Principles of management accounting.....................................................................................3
2.The role of management accounting and management accounting systems............................4
3 Calculate costs using appropriate techniques of cost analysis for formulating an income
statement using marginal and absorption costs...........................................................................6
4. Evaluating how management accounting is integrated within the organization.....................9
CONCLUSION................................................................................................................................9
PART 2..........................................................................................................................................10
1.Explaining the use of planning tools used in management accounting ................................10
2.Comparing different ways in which organizations could use management accounting to
respond to financial problems...................................................................................................12
3. Recommendations.................................................................................................................14
CONCLUSION .............................................................................................................................14
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting is the systematic process in which company prepare reports
about business transactions that help them to make strategic decisions. The present report will
provide detailed information about medium-sized organization smith brothers deals electrical
engineering contractor and providing services in high voltage projects. In addition to that, the
study will calculate income statement using variable costings in order to support business
success. The present report will provide principle of management accounting. Further the case
study will give information about role of management accounting system and benefits of the
function to the company.
PART 1
1.Principles of management accounting.
Management accounting is the method used by company in order to find financial
information so that managers and top-level management can make decisions on the basis of
relevant data. The detailed information provide highlights about company's wealth and financial
position of the firm. Management accounting done by company should be ensured proper
utilization of available resources effectively (Management accounting and its importance, 2021).
The system of management accounting can provide different methods and approaches to control
the costs. The main objective of the management accounting is to avoid errors, mistakes and
minimize losses in order to make profit, so it will ultimately increase productivity.
Designing and compiling
Accounting reports, transaction and other related information should be designed in
proper way to meet organizational goals and deal with business issues. The management
accounting system should be compiled systematically with the help of relevant information based
on previous data.
Control at source Accounting
Management accounting helps to control costs which are incurred during the business
operations (Mahmoudian and et.al., 2021). The detailed information about raw materials, repairs
and maintenance etc. are provided in the form of qualitative and quantitative information.
Accounting for inflation

It is important for management team of the company to assess the capital value
contributed by the owners of the firm. Therefore, management accounting system keep track on
rate of inflation to judge the real value of the money. The rate of inflation is taken into
consideration in order to evaluate the business performance and financial health of the company.
Utilization of resources
The business available resources should be effectively used in order to maintain cost,
expenses and other activities. The management accounting system should be ensure about that
the firm utilize its available resources.
Forward looking approach
The management accounting system can guess the problems through different method in
order to provide future looking approach.
2.The role of management accounting and management accounting systems
The major role of management accounting is to conduct a relevant information which is
based on cost analysis, expenses done by the company, profits made by the firm and give
recommendations for future business activities (Gunarathne, Lee and Hitigala Kaluarachchilage,
2021). The managers of the smith brothers do their duties such as recording of transaction, risk
management, planning for future goals, managing organization investments in order to make
decisions.
Management accounting system plays a vital role in forecasting future related business
needs and for strategic planning with the help of market research. The management team of
smith brother can analyse and maintain reports such as liquidity, cash flow statements and other
transactions.
Different types of management accounting systems.
Cost accounting systems- It is the system used to estimate the products costs for
profitability analysis, inventory valuation and cost control. The major role of cost accounting
system is to lower the cost of the business transaction in order to make profit margins. By
controlling relevant items in the firm, the managers can improve profit maximization
(Maheshwari, Maheshwari and Maheshwari, 2021). Smith brothers management team uses this
system to make good costing system by ensuring proper accounting for overheads, labour and
raw materials.

Benefits- with the help of this method, company can minimize wastage and determine the selling
price of the products or services. This system calculates the profit and loss made on each product
in order to make profitability.
Drawbacks- The major disadvantage, it is very costly in nature and sometimes the results are
misleading which can affect the efficiency of the business.
Job costing system- This system is used by firm to keep track on cost of materials that
are being used during course of the job and provides detailed information about it.
Benefits- The system provides analysis of the labour, overhead and materials for each job in the
firm. It will be useful because it can easily keep record on all expenses done by the company on
regular basis.
Drawbacks- sometimes this system create conflict within the company because of overload
paperwork as the overheads cannot be controlled.
Inventory management system- It is the system used by company to keep track on
goods throughout their entire supply chain. This system provide detailed information about
inventory management approaches in the business. The process provides a real time view of
inventory across all selling channels in the firm (Astuty and Pasaribu, 2021). Smith brothers used
ERP method of inventory management which is known as enterprise resources planning. It
allows to manage all business activities such as logistics, planning and financial activities.
Benefits- It is beneficial for the company because it helps to manage multiple locations and
stocks outs. This system keeps proper track on stocks in order to reduce risk of overselling and to
control unnecessary expenditure. It improves business negotiation for cost savings while making
inventory related decisions. The system helps the company to minimize stock outs and excess
stock in order to simplify inventory control system.
Drawback- The major disadvantage of this method, it is expensive process and show limited
elimination of risk in the business.
Price optimization system- This system of management accounting gives proper
understanding about how much business the company obtain within profitability levels on the
basis of how sensitive their customer are to changes in prices of product. It is mathematical
process that can be used to calculate about the demand of products at different price levels.
Smith brothers management team combine the important data with inventory levels in order to
suggest prices that will increase profits.

Benefits- customers are more attracted to pick up on products when they feel priced optimally
so, the firm utilize this method to maximize its sales and profits. The best and relevant price of
the products or services will allow company to achieve success.
Drawbacks- the major drawback of this system is that it prevents needy customers from getting
the things they need on their daily basis. When the clients cannot afford to purchase necessities,
they are denied to utilize the products.
Different methods used for management accounting reporting
Cost accounting report- This method includes information of provider such as charges,
data utilization and cost by centre. It is helpful to keep the customer informed and help them to
control costs. This report is utilized by firm to determine the cost per equivalent unit in the given
project. Unnecessary expenses and profits are estimated with the help of cost report of
management accounting.
Budget report- A company uses this method to know past estimated budget over a time
period and shows all the profit and loss to measure the financial or actual position. It is also
maintained to provide incentives to employees that motivated them to achieve success.
Account receivable Ageing report- This method is used by smith brothers manager to
show the invoice balance which is unpaid with the time period. The firm can layout credit and
selling practices within business activities. It keeps proper track on slow paying clients and used
to attain detailed analysis of problems associated with company's collection process.
Performance report- This report is maintained by the firm which shows overall
departmental reports to make strategic decisions. The company keeps an accurate measure of its
financial strategy. In addition, management team must determine the evaluation of competitor
analysis and its marketing approaches. To attain the most effective financial decision it is
important to have authentic managerial accounting report.
3 Calculate costs using appropriate techniques of cost analysis for formulating an income
statement using marginal and absorption costs
For example- the specified organization has following expenses for the month December 2020
Particulars Amount£
Units 50000
Selling price per unit 40
Direct material 20

Direct labour 10
Variable production overhead 4
Variable selling expenses 5
Fixed manufacturing
Overheads 200000
Fixed admin and distribution
costs 50000.00
Working note 1:calculation of production cost per unit
Particulars Amount£
Direct material 20
Direct labour 10
Variable production overhead 4
Fixed production overhead 4
Total production cost 38
Calculation of variable cost
Direct material 20
Direct labour 10
Variable production overhead 4
Total VC per unit 34
Absorption costing is one of the technique which is associated with measuring all the
cost associated with manufacturing product (Absorption Costing, 2021). In this type of costing
the focus is given on having relevant processing of calculating by diving direct and indirect in
turn proper knowledge can be derived.
Income statement as per the absorption costing technique

Particulars Amount £ Amount£
Sales ( Revenue) 2000000
Less: COGS
Direct material 1000000
Direct labour 500000
Variable production
overhead 200000
Fixed production overhead 200000 1900000
Gross profit 100000
Less: Indirect expenses
Variable selling expenses 250000
Fixed admin and
distribution costs 50000
300000
Net profit -200000
From the above presented income statement it can be specified that net profitability is -
200000 which is indicating that firm has higher expenses. It can be interpreted that there are
higher direct expenses which is leading higher indirect expenditure.
Marginal costing is one of the technique which basically give focus on dividing expense
on the basis of variable and fixed (What is Marginal Cost? 2021). It is one of the significant
technique which is helpful in gaining proper information regarding cost so that contribution &
profitability can be achieved.
Income statement as per the marginal costing
Particulars Amount £ Amount£

Sales ( Revenue) 2000000
Less: Direct material 1000000
Direct labour 500000
Variable production
overhead 200000
Variable selling expenses 250000
1950000
Contribution 50000
0
Less: Fixed expenses
Fixed manufacturing
Overheads 200000
Fixed admin and
distribution costs 50000.00
250000
profit -200000
From the above illustrated table it can be specified that higher information regarding
prevailing performance can be derived. On the basis of this, it can be specified that marginal
costing is one of the significant technique which is helpful in achieving knowledge regarding
fixed and variable expenses so that proper insights of poor performance of company can be
derived.
Reconciliation of Profit figures
Particulars Amount £
Profit under absorption -200000

difference in fixed production
overhead Nil
Profit under marginal -200000
From the above presented information it can be interpreted that both the techniques of
marginal and absorption is crucial for gaining depth insights regarding performance of company.
It indicates that there is no difference in loss derive from both the mentioned income statement.
There is lacking of efficiency of performance of managing cost which is required to be improved
in order to gain profitability and sustainability for success.
4. Evaluating how management accounting is integrated within the organization.
Management accounting system helps managers to make business related decisions with
the help of budgeting in order to control unnecessary expenses (Alvarez and et.al., 2021). This
system compare the budget to actual expenses done by the company to evaluate the financial
information.
Managerial accounting helps managers to make operational decisions to understand the
operational efficiency of the company so that it can be helpful to make long term investment
decisions. This system influences the important decisions made by the company in order to
effectively ensure the procedure of the process is integrated into the company's culture.
The company measure the input cost and reduce unnecessary expenses to evaluate the
financial health of the firm. It provides brief information about resources of the company such as
cash inflows-outflows. It measures what is beneficial for the firm and detects errors to form long
term strategies to make budget decisions and effective production.
CONCLUSION
To conclude, management accounting system ensures proper controlling of business
transactions as well as employee's work performance. By evaluating the report, it is concluded
that management accounting is essential for successful business. It keeps proper record of
business transactions, expenses, cash inflows-outflows and collection of cash, stocks and budget
control. The present report also summarized that company analysis management accounting
system and its reports to make decisions. Using cash flow statements, capital investment and

marketing research company can analyse performance of the business. Managers can make short
term and long term strategic decisions with the help of financial reports. At last, the report has
summarized that an effective managerial report provide information regarding market factors,
profitability and team's performance.
PART 2
1.Explaining the use of planning tools used in management accounting
Analysing the financial statement and business transaction is the main tool of
management accounting system. Every company collect data, financial information which
includes cash flow, profit and loss, expenditures and fund flow statements. So, it is important to
keep proper track on budget and use different tools to maintain budgetary control.
Cash Budget- A cash budget is prepared by company to estimate cash inflows-outflows
of business over a specific time period. This planning tool could be done on weekly, quarterly
and annual basis (Regan and Brown, 2021). This budget planning tool is utilized by the company
whether they have sufficient cash to continue business operations. It will ultimately provide
detailed information about financial health of the firm and overall productivity.
Advantages
 Cash budget calculate the amount of
credit the organization can extend to
customers, provide management focus,
cash inflow details.
 The company uses this budget to avoid
the needs of debt which can reduce the
unnecessary expenditure.
Disadvantages
 The preparation of this budget limits
the utilization of the cash to a certain
expense which is not beneficial for the
organization.
 The major disadvantage of this budget
is it only considers financial outcomes.
The results are as the business
transactions shows the loss towards the
cash flow which allows the company to
do early payments which is related to
remaining profit.

Zero based Budget- This planning tool is a way of budgeting control in which the
company prepared its budget report from zero base (Khalifa and Alodhaibi, 2021). It is noted
that all the factors of budgeting tool must be justified for period of budgeting. It is noted that
while making this report in strategic way the highest revenue of business operations is taken into
consideration.
Advantages
 This method is helpful for the company
to build their annual budget report from
zero in order to verify all related
components are cost effective or not.
 The major benefit this method is
business focused operations, low cost,
flexibility. It will be helpful to achieve
strategic business goals and understand
the position of company with annual
reports.
Disadvantages
 The major disadvantage of this method
is it is a time-consuming process and
also could be detrimental to company’s
business financial objective.
 Sometimes top-level department of the
company blame other departments if
the does not receive proper budgeted
results.
 Because of an unpredictable income of
the company, sometimes this tool is
difficult to use and make task difficult
to perform.
Activity based Budget- This method is used by firm to research, analyse and record
business activities that leads to company’s costs. In order to create efficiencies, the company
maintain this budget in potential ways. There are total three stages in this budgetary tool which is
mandatory for company to perform such as – company needs to identify cost drivers, measure
total units and estimate the relevant cost per unit.
Advantages
 This budgetary tool is helpful to reduce
all unnecessary business activities,
which help the company to save funds.
This saved cost will be helpful in
production cost of products at
reasonable price. It is also helpful to
Disadvantages
 It is more expensive in nature as it
requires high amount to maintain
traditional budgeting approaches and
method.
 It takes a lot of time to complete task as
it need additional business related

gain competitive advantages by
adopting competitor’s analysis.
 This budget provides details about
revenue and expense which is helpful
to company in order to proceed with
projects.
assumptions from company’s
management. This method also need
potential knowledge and skills in order
to avoid any uncertainty in the future.
 This budget tool also requires technical
details in order to maintain capture
costs of amount at particular level.
2.Comparing different ways in which organizations could use management accounting to
respond to financial problems
Benchmarking- Benchmarking is the process of comparative analysis in which the
company measure its product or services and to find out the business performance with the help
of market research. There are total four stages of this process such as plan, analyse,
implementation and action. For example- smith brothers compare its products and its
performance metrics to industry the best practices from other organizations.
Advantages
 The major benefit of this process are set
performance and productivity
expectations, enable a positive culture
in the company of continuous business
improvement.
 With the help of this process, the
company can gain an independent
perspective about business performance
in the competitive market. This also
shows how well the firm is performing
as compared to other industry.
Disadvantages
 The major drawback of benchmarking
is lack of information and lack of
customer satisfaction. It is possible that
the firm may not get adequate
information for benchmarking process.
 Due to this scenario, the firm tend to
totally depend on strategies of other
industry to achieve goals.

Key performance indicators- A key performance indicator is used by company to
measure the value of business and shows how effectively a firm is achieving its business goals.
Key performance indicators majorly focus on operational and strategic decision-making process
(Burlea-Schiopoiu and Ferhati, 2021). Moreover, this method provides a focus attention on
operational improvement and analytical tool. An effective KPIs provides goals and objective to
achieve success and desired target. This technique offer a comparative analysis that gauges the
performance degree which change over the period.
Advantages
 The major benefit of key performance
indicator is to plan what the company
want to achieve by when with the help
of this method. It is helpful to evaluate
the business success and employee
performance.
 With the help of this method, company
can track efficiency, quality,
behaviours, performance of project and
utilization of resources.
Disadvantages
 The major disadvantage of this method
is it does not provide actionable
information immediately as it is a time-
consuming process.
 Sometimes it creates confusion because
company overload themselves with too
many indicators to analyse the overall
performance of the firm and employees.
Financial governance- It is a systematic way a firm measure, collects, controls and
monitor the financial information related to business activity. It also involves the strategies of
company which shows how firm keep proper track on their financial transaction such as cash
flow, expenses income and others. It also includes managing performance at individual level and
control performance data and operational information.
Advantages
 It is useful to company in order to place
control on financial information and
business related data. The firm needs to
be sure about financial transactions
using the accurate and correct version
of data so that it can complete business
Disadvantages
 The major drawback is that the
company sometimes make assumptions
about the future circumstances related
to business and project (Disadvantages
of financial governance, 2021). As the
nature of future is unpredictable so

reports and plan accordingly.
 It is helpful to make better decision in
order to enhance managerial efficiency
so that company can achieve profit
maximization.
things do not turn in a good way thus,
this creates uncertainty about the future
success.
 In order to evaluate actual performance
of the company, financial governance is
helpful and it is properly maintain by
them. But it requires a lot of time and
efforts to complete this task.
Comparative analysis- It is the process of comparing two or more data related to business
such as products and services, strategies, performance, customer satisfaction, customer base and
employees performance, market position, market share and others.
By evaluating the study, it is noted that smith brother utilizes key performance indicator
in order to measure the company's performance on the other hand Captify is a medium-sized
organization deals in intelligence and media marketing decisions utilizes benchmarking to
measure the overall position of the firm.
3. Recommendations
By analysing the report it is recommended to utilize benchmarking method and
indicators to measure the performance of the company. With the help of this method, firm can
achieve detailed information about revenues and sales in order to achieve sustainable business
success. It will ultimately help a business to achieve its goals by analysing and communicating
business information to managers of the company.
CONCLUSION
Managerial accounting is a systematic practices done by firm to provide financial
information to top-level management in order to make decision-making process successful. In
addition to that, firm is focusing on its budgetary planning tools to maintain its budget plan
effectively. The company is maintaining cash budget and its report properly to evaluate cash
inflow and outflow. Furthermore, it is also concluded that company uses key performance
indicator to measure the overall performance of its business.

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