Report on Management Accounting Principles and Applications

This report provides a comprehensive overview of management accounting principles and their application within an organization, focusing on Anglo American. It examines the role of management accounting in decision-making, risk management, and budgeting, highlighting various management accounting systems such as traditional, lean, transfer pricing, cost accounting, and inventory management. The report discusses methods used in management accounting reporting, including budget reports, accounts receivable aging reports, cost managerial accounting reports, inventory reports, and performance reports. It also analyzes the use of marginal and absorption costing methods in preparing income statements, evaluating their impact on profit calculation. The report concludes by emphasizing the importance of management accounting in achieving sustainable success and provides recommendations for improving financial performance. Desklib offers access to similar past papers and solved assignments for students.

5 – Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
Part -1...............................................................................................................................................3
Principles of management accounting.........................................................................................3
Role of management accounting and management accounting system.......................................4
Methods used from management accounting reporting...............................................................6
Use of techniques and methods in the preparation of income statement.....................................8
Evaluation of management accounting........................................................................................9
Part – 2...........................................................................................................................................10
Use of planning tools in management accounting.....................................................................10
Analyse use of different planning tools.....................................................................................11
Management accounting............................................................................................................11
Analysis of how management accounting lead to sustainable success......................................13
CONCLUSION..............................................................................................................................14
REFRENCES.................................................................................................................................15

INTRODUCTION
Management accounting refers to presenting financial information for internal purpose so
that management can take decision which is beneficial for organisation. It includes, product
costing, making budgets, forecasting and financial analysis (Abdusalomova, 2019). Management
accounting helps in making plans for future so that goals and objectives of company can be
accomplished. The report examines, principles of management accounting, role of management
accounting and management accounting system in an organisation. Use of techniques and
methods in management accounting and financial statement support growth of business is
discussed. Evaluation of how management accounting is integrated with organisation, benefits of
function to the organisation. Further, conclusion that reflect application of management
accounting is discussed.
Management accounting plays a crucial role in managing all the activities in an organisation
(Rikhardsson and Yigitbasioglu, 2018). Anglo American is a public limited company which was
founded in 1917. Its headquarter is situated in London, England, UK and serves all over the
world. Key people of company are, Stuart Chambers (chairman of board), Mark Cutifani (CEO).
The report examines, planning tools in management accounting, their advantages and
disadvantages. Effectiveness of management accounting in dealing with financial problems and
preventing issues in a company. Further, recommendations are provided which can be used by
company to accomplish goals and objectives.
Part -1
Principles of management accounting
There are some principles of management accounting:
Management by exception – this principle is followed when presenting information to
management. It refers to apply budgetary control system and costing techniques which is
followed in management accounting system.
Designing and compiling – it means accounting information, recording transactions, financial
statement of past and present results so that future needs can be fulfilled. It is important for every

organisation to record business transactions so that forecasting can be done (Abdusalomova,
2020).
Utilization of resources – resources should be utilized properly because there is scarcity of
resources. Management accounting ensure that resources are utilized efficiently and
training ,must be given to employees so that there will be less wastage of material.
Absorption of overhead cost – the overhead cost is combination of indirect materials, labour and
indirect expenses. It is essential to absorb overhead cost so that plans can be made accordingly.
Role of management accounting and management accounting system
Management accounting plays a crucial role in an organisation because it helps in
recording transactions, manage company investment, risk management, budgeting, planning,
decision making. Management accounting helps managers in determining financial position of a
company and better plans can be made which is beneficial for growth and development of firm.
It also helps in analysing income and expenses of company, past and present financial position
which is beneficial in taking decision for future growth (Latan and et.al., 2018). It is the
responsibility of manager to determine total expenses and income, prepare a budget so that funds
can be arranged accordingly. With the help of management accounting, managers can make
plans for achieving future goals and objectives.
Different type of management accounting system are:
Traditional system – this system is used for tracking cost and using process costing method. It
allocates cost of direct material, labour and overhead cost. This management accounting system
helps in used in large projects so that cost can be traced and better plans can be made for
reducing cost.
Lean accounting system- this system focuses on reducing cost and eliminating waste. This helps
in achieving goals and objectives of company by eliminating unnecessary material and make
efficient use of resources. This system reduces excess cost and cut from system based on this
information. Lean accounting system helps managers in taking quick decisions and they can
make better plans or strategies for achieving targets.
Transfer pricing – this system cost good as they are moving through different departments. The
common cost is added to transfer price which includes variable cost and opportunity cost. The
flexibility of system helps company in achieving targets (Chaudhry and Amir, 2020).

Cost accounting system- As per this accounting system production activities are recorded with
the tracking of flow of inventory along with the various stages of production (Kostyukova, and
et.al., 2018). Under this system a track over the raw material with regard to their movement from
the production to the conversion of finished goods are take place.
Example:
When the raw material moves from one operation to the next this system track its
performance. With the help of this system cost and production managers would analyse that how
much inventory is required at every stage of production.
Advantages:
With this system the expenses in terms of cost will be controlled. Likewise, an accurate
determination of the cost would also be take place under this system. It also guide decision-
making and pricing policies.
Disadvantages:
It is a costly affair and sometime leads to misleading. It cannot be adopted by the small
business. It is a time consuming process.
Inventory management system- As per this system the tracking of goods is performed
throughout the supply chain i.e. through production to the end sales (May, Atkinson and Ferrer,
2017). This means that with the execution of inventory management the inventory are being
tracked during the entire journey of supply chain.
Example:
ABC company has started a business under which it makes sale of its product. in order to
make the product it requires to purchase raw material from various suppliers and then make it
assemble and finally make sales. As per its inventory register all these three activities are being
tracked. Thus, with the help of this register a management of inventory is being performed and
executed.
Advantages:
With this system the cost saving along with the risk of overselling and over costing will
be reduced. Likewise, it assists the organization to minimise and reduce the risk associated with
over or under stocking.
Disadvantages:

It is an expensive method. Likewise, it includes various complexities in terms of tracking
and execution. It avoid minimum intensity of risk and does not ensure risk proof process.
Methods used from management accounting reporting
Management accounting reports are the information and analysis of the financial
information that is being gendered as per the requirement of the company and managers of the
concerned company. It is used for planning, regulating, decision-making along with measuring
the performance of the company and its operations.
It majorly includes the following reports:
Budget report:
As per this report budgets are prepared in the context of the company. With the
preparation of budget, the actual performance of the company is measured against the standard
and budgeted performance (Brown, and et.al., 2017). This would enable the organization to take
corrective action and making of improvement in its operations in case of finding of any deviation
and differences.
Account receivable aging report:
As per this report a detailed analysis regarding the defaulter is being made. This report is
usually suitable for the small business and organization that perform its business on the basis of
enabling of credit. Through this report manager determine the defaulter whose payment is due
and crossing the deadline of the due (Beerbaum, D., Piechocki, M. and Puaschunder, J.M.,
2019). As cash flow is a critical aspect with regard to the company so with the help of this report
the payment will be received and grabbed from the defaulter and enable the company to have
sufficient funds receivable.
Cost managerial accounting report:
As per this report, determination of the cost with regard to the manufacturing of the
product is being performed. This report is prepared on the basis of addition of material, labour
and other overhead cost in association with the manufacturing of the product. With the help of
this report managers would able to determine the incurred cost in association with the product
and then make it compared with the selling price so that the cost determination would done. This
will help the company in reducing the cost and maximise the profit.
Inventory report:

As per this report management of inventory is performed and analysed. Under this report
the physical state of the inventory in hand, inventory need to be ordered and inventory that will
be needed to use in business is analysed. This report enables the adequate controlling and
tracking of inventory. With the preparation of this report managers manage the over and under
inventory situation and ensures smooth running and operation of the business of the company.
Performance report:
As per this report, performance of the company will be determined on a broader scale.
This will assist the managers to take the strategic decision in regard to company. In case of big
organization, department performance report is generated that depict the performance of the
department. With the help of performance report the management of the concerned organization
make the comparison of actual performance with the planned so that the further action in regard
to the improvement of the performance will be taken.
In case of Anglo American majority of the reports including performance, cost
managerial, budget and various other reports are prepared. With the analysis of these reports the
actual performance of the company are being measured by the managers along with
determination of best strategic policy that will lead to raise the existing performance. It enable
the organization to take corrective actions in case if the existing performance is lack behind the
planned and standard performance.
Benefit of management function:
Management accounting and its concerned functions play an important role with regard
to the business. As management accounting is related with the process of identification,
analysing and interpretation of information to managers so with the aspect of management
accounting, managers would take most suitable decision with respect to business in terms of its
success and goal accomplishment.
Management accounting also assist the Anglo American to make controlling along with
assisting towards the direction of its goal. With the performance of management accounting
function Anglo American would able to keep its business on track along taking of most
appropriate decision in the context of business. It also assist the company in making planning,
along with analysing the performance so that the goal in terms of profit maximisation and
reduction of losses would be able to incorporate.

Use of techniques and methods in the preparation of income statement
In the preparation of Income statement there are generally two methods which are being
implied by the organization:
Marginal costing method:
As per this costing system the variable cost is considered as product cost while the fixed
cost is the cost of the entire period (Banerjee, 2021). Under this system the variable cost is
charged with the unit of cost while the fixed cost will be completely written back from the
contribution. It is concerned with the change in total cost when the produced quantity is raised by
one unit.
Absorption costing method:
Under this system the overall cost with regard to the manufacturing of product is
considered. All the direct and indirect cost is a part of this costing method. It lead to the
determination of actual and net profit in association with the organization because under this
system the entire expenses in terms of direct and indirect are deducted (Brierley, 2017).
Income statement as per marginal costing system:
Sales £ 200000
-Variable cost £ (25000)
Contribution £175000
-Fixed cost £(50000)
Net Profit £125000
Income statement as per absorption costing system:
Sales £250000
-COGS £(50000)
Gross profit £200000
-Indirect expenses £(40000)
Administrative expense 20000
Marketing expenses 15000
Selling expenses 5000
Net profit £160000
Interpretation and suggestion:

From the above analysis of the income statement, it can be interpreted that the profit that is
being calculated from the absorption costing would be more appropriate in comparison with the
marginal costing method. This is because with the aspect of absorption costing all the expenses
are being considered with the determination of net profit. However, with regard to marginal
costing only the aspect of fixed and variable costing is focussed. In addition of this it is also to be
noted that with the concept of marginal costing only the contribution cost per unit is calculated
while in case of absorption costing the net profit per unit is considered.
Likewise, it is also observed that in case of marginal costing there are consideration of
generally two expenses that include fixed and variable while the production of the product
includes various other expenses like administrative, selling and many more. Thus, the absorption
costing system gives a clearer picture of profit in comparison of the marginal costing. Through
the aspect of absorption costing the cost of each unit would be able to determine while the
marginal costing is concerned with the cost of next produced unit.
Thus, in order to have appropriate determination of profit and unit cost, it would be right to
state that absorption costing system is more beneficial in comparison of the marginal costing.
Also through the system of absorption costing accurate profit with the deduction of all the
expenses will be determined that assist the management in making controlling over the expenses
and cost along with maximisation of the profit percentage.
Evaluation of management accounting
Management accounting helps in maximising profit and minimise losses. This is concerned
with presentation of data in finances which is beneficial for managers to take important
decisions. It has wide scope and includes different business operations. The aim of management
accounting is to reduce cost by eliminating unnecessary expenses and make efficient use of
resources. This helps in accomplishing goals and objectives of company and better plans can be
made which is beneficial in growth and development of organisation. In Anglo American
managers make plans or strategies so that they can achieve targets and training is provided to
employees so that they can use resources efficiently (Rikhardsson and Yigitbasioglu, 2018). It is
the responsibility of managers to evaluate performance of employees and take necessary steps
for improving their performance. Management accounting helps in maintaining record so that
comparison can be done between past and present situation.

Part – 2
Use of planning tools in management accounting
There are some planning tools which is used in management accounting for budgetary
control. It is important to apply planning tools so that goals and objectives of company can be
accomplished on time. planning tools in management accounting for controlling budget are,
pricing strategies, budgets, strategic planning and costing system. For achieving target, it is
essential to make plans or strategies so that company can perform better than others. Planning
helps in providing direction to employees and beneficial in growth of organisation. Management
accounting is used in planning because it helps in making plans for development of company.
Management tools are:
Budgetary control- It is used for managing income and expenses in an organisation. This tool is
used in planning as budgets are made according to past records and present situation of company.
For achieving target, it is essential to make plan for income and expenses of organisation. It is
the responsibility of manager to identify expenses which will occur and source of earning
income. Budget is made to monitor performance, manage funds effectively. It also helps in
allocating resources which is required for project, helps in achieving goals and objectives of
company. When plans are made it helps in taking good decision and increase motivation of staff
members. Disadvantages of budgetary control are, budgetary revision required, problem of
coordination, depends upon success of top management, conflict among different departments
(Mack and Goretzki, 2017).
There are different types of budgetary control which is beneficial for an organisation are,
financial budget, operating budget and non- monetary budget. Financial budget helps in
predicting future income and expenses of company. It helps in identifying financial position of
Anglo American and managers can make better plans which helps in growth of firm. Operating
budget means detailed estimation of revenue and expenses over a period of time. This helps in
determining expected activity during the year. Non- monetary budget express non- financial
sales and expenses. It also determines profit and if profit is less than company should increase
sales budget. So, these are some types of budgetary control which helps in making plans so that
goals and objectives of company can be accomplished.
Financial planning – Financial planning is a step by step process which helps in meeting goals.
Financial plan helps in controlling income, expenses and investment so that goals can be

accomplished. It is important to make plans or strategies related to funds and try to make budget
to forecast about future income and expenses. Advantages of financial planning are, reduced risk,
succession planning, achieving goals and objectives (Alexander, 2018). It is important to make
financial planning to achieve targets and helps in motivating employees. Financial planning is
key to success and helps in accomplishing targets. Disadvantages of financial planning are, rapid
changes in environment and policies, external factors, time consuming and expensive process,
uncertain future. This tool has lack of accuracy and there are some factors which affect
performance of company.
Analyse use of different planning tools
Different planning tools help in preparing budgets and forecast about financial position of
an organisation. Planning tools help owners in effective forecasting, elimination of threats,
systematic planning and helps in achieving goals and targets. Planning tools are useful for
company because it helps in making plans and forecasting about future income and expenses of
Anglo American. For achieving goals and objectives, it is essential to identify expenses of
company and how much money they can earn. It is an estimation so that strategies can be made
accordingly. When plans are made then it is easy to work and targets can be achieved. The
purpose of applying planning tool is to determine financial position of company and prepare
budgets (Alsaid, 2021). This helps in performing better than others and there will be no issue
related to funds.
For running business smoothly, funds are required and managers are responsible for
arranging funds so that work can be done properly. Budgetary control helps in making budgets
so that it can be identified how much money is required. When managers make budget then it
becomes easy for employees to work and all the activities are properly arranged. Financial
planning helps in achieving goals and objectives by providing direction to employees. This helps
in forecasting future financial position of company.
Management accounting
Management accounting refers to identifying, measuring, analysing and communicating
financial information to managers so that goals and objectives of company can be accomplished.
In Anglo American company management accounting is applied as all the transactions are
recorded and measuring result of financial changes. This helps them in making better plans for
future and arrange funds so that work can be completed on time and there will be no issue. For

taking decision company is using cost information and evaluating performance of employees. In
another company, Rio Tinto members are recording business transactions and measuring result
after implementing plans. It is essential to analyse plans or strategies before implementing so that
targets can be achieved (Oyewo and et.al., 2021). Managers of this company take decision after
analysing market situation.
Management accounting is the key element which helps in enhancing success of firm.
Management accounting helps in providing direction to employees, identifying problem,
analysing and communicating. It is the responsibility of managers to record business transactions
and compare past and present performance so that mistakes can be identified. For growth and
development of firm, it is essential to make plans and strategies after analysing market situation.
Management accounting is beneficial for an organisation as it helps in planning, organising,
controlling, decision making (Ameen and et.al., 2018). It helps in understanding financial data,
strategic management and identifying problem so that solutions can be find out.
Every company is recording business transactions so that they can make future plans by
analysing past and present situation. For achieving goals, managers should make plans or
strategies and give instructions to employees properly. This reduces chances of mistakes and
goals can be accomplished without any issue. In Anglo American company managers are
applying management accounting system for responding to financial problem like, using
budgetary targets, key performance indicators are used for evaluating performance of employees
and changes are made in plans if required. This system is applied by company to determine
performance of workers and provide development programs for improving performance. In Rio
Tinto company, management accounting system which is applied are, benchmarks to identify
problems, key performance indicators, budgets are made so that they can perform better than
others (Jayasinghe, 2021). It is essential to evaluate performance of employees and provide them
training so that they can work efficiently.
Both organisations are applying different management accounting system to respond to
financial problem. This helps in achieving goals and objectives of company by identifying
problem and finding solution. Management accounting system can be defined as systematic
process which helps in controlling all the activities in an organisation. It is used to influence
members and boost their confidence so that they can work efficiently and focus on achieving
goals of company.