Management Accounting: Principles, Role, and Techniques

This report by Desklib discusses the principles, role, and techniques of management accounting. It explains how management accounting affects organizations and how financial records help in tracking expenses and profits. The report also includes an analysis of Thomas Swan and Co. Ltd. and elaborates on various planning tools in management accounting such as financial planning, analyses of financial statements, cost accounting, fund flow analysis, and cash flow analysis.

Management
Accounting

Table of Contents
Introduction-................................................................................................................................................3
Task 1-.........................................................................................................................................................3
Principles of management accounting-....................................................................................................3
Management accounting role and its systems-.........................................................................................5
Techniques of management accounting-..................................................................................................5
Task 2-.........................................................................................................................................................8
Planning tools in management accounting-.............................................................................................8
Task 3-.......................................................................................................................................................10
Solving Financial Problems through planning tools-.............................................................................10
Conclusion-...............................................................................................................................................12
References-................................................................................................................................................12

Introduction-
This report is based on management accounting. Importance of management accounting in an
organization is learned in this report. It keeps record of daily transactions. These records help
users to compare current financial information with historical data. Financial records help in
tracking expenses and profits. There are 3 types of statements generated by accounting- Income
statement, balance sheet and cash flow statement. Accounting records give information about
financial position of the organization. Management accounting not only tells about what is going
on with the organization financially but also these records help in comparing current data with
the historical data for budget allocation.
In this report analysis of Thomas swan and co. ltd. is done. It is founded in 1926 by Tommy
Swan. This organization is a UK based medium-sized chemical manufacturing company. It is
headquartered in County Durham, England. Company offers flexible custom manufacturing
service. Company produces over 100 products in kilogram and multi tone quantities. It is
leading supplier to the international chemical markets. Organization uses customer focused
approach which helps in offering outstanding services and support to customers.
Task 1-
In task 1, elaborated discussion about management accounting is done. How management
accounting affects the organizations. If management accounting is not done properly then
company may face financial problems in future. Financial records tell about the financial
performance of the company. If company is financially stable then it is a positive sign. Financial
records help in financial management of the company.
Principles of management accounting-
There are some best known principles of management accounting. Which are as follows-
 Accrual Principle- According to this concept, accounting transactions should be recorded
in accounting periods rather than when cash flow is associated with them. If company
ignores accrual principle it means company is recording expenses when company is

paying for it. This principle is important for construction of financial statements.
Financial statements show what is happening in ac accounting period.
 Conservatism Principle- This concept says that company should record its liabilities or
expenses as soon as possible but before recording assets company has to make sure that
they will occur. That’s why it is known as conservatism principle. This principle
encourages recordation of losses earlier, rather than later.
 Consistency Principle- As the name suggests, this principle is based on consistency. It
means if a company is adopting a principle or method then it should be consistent about
that principle or method. Company needs to use that method until a better method comes
along.
 Cost Principle- A business should record only assets, liabilities and equity investments at
their original purchase costs. This principle is less valid.
 Economic entity principle- Transactions should be kept separate from its owners and other
businesses.
 Full disclosure principle- If any information that may impact understanding of readers of
financial statements should be disclosed.
 Going concern principle- According to this concept, company will continue to exist and
operate in future. It allows company to do prepaid expenses and record it.
 Matching principle- Company’s each revenue should be matched and recorded with all
related expenses, at the same time.
 Materiality principle- If any item affects the decision of an individual reading company’s
financial statements then it is considered as ‘material’
 Management by Exception - This principal of management accounting is mainly
demonstrate the specific information to the management. It clearly means that budgetary
control system & standard coating method are mainly followed on context of
management accounting system.
 Control at source accounting - basically cost are container as the best control at a
specific point when they are incurred & maintain control at the source accounting system.
Performance of the individuals, utilization & usage of the service like machinery, repairs,
maintenance are mainly prepared in the qualitative & quantitative form.

 Use of return on investment - ROI also known as "Return on Capital Employed". Rate
of interest is demonstrating the effectiveness of business & the prime purpose, the capital
employed is mainly calculating in context the value of real money.
 Controllable & uncontrollable cost - As per the controllability of the costs, it is
analyze that cost are two types like controllable & uncontrollable cost. Management
accounting system is helpful to provide specific technique which can useful to control the
controllable costs.
Management accounting role and its systems-
Management accounting helps managers to make financial decisions. Management accountant
performs series of task. Management accountant ensures organization’s financial security.
Management accountants prepare framework of cost and financial accounts and prepare financial
statements which help in making financial decisions.
Long term and short term planning of funds are done by management accounting. Accounting
record all the transactions related to business which include profit, expenses etc. Routine reports
are forwarded to managers to take corrective actions at time. With the help of financial
statements company is able to raise funds. Accountant of the company decided the part of debt
and equity. Management accountant has to maintain capital structure, leverage and trading on
equity. Accountant has an important position in organization as he performs staff function and
also has line authority over the accountant and other employee in his office. Accountant forwards
relevant information from the irrelevant information to the top management. Accountant does
analysis of records and prepare budget. For example- standard costs, budgets, variance analysis
and interpretation. Accountant is also responsible for cash and fund flow analysis, liquidity
management, evaluation of performance and responsibility accounting etc. for control.
Management accounting is playing a significant role & also maintains an appropriate system so
that business can maintain their financial structure effectively. Some specific role of
management accounting like Management accounting is helpful to maintain the capital structure
of the company, involvement in the management process, develop and manage specific
information system, control, stewardship accounting & appropriate decision making. All these

Management accounting rules are beneficial to maintain a specific system so that businesses can
manage their financial performance in an effective manner. Management accounting system is
helpful to maintain the overall financial performance of the company. System can help full to
track the internal operations so that company can properly maintain the effectiveness of company
and enhance the healthy competitive environment (Oyewo, 2020).
Techniques of management accounting-
There are various accounting management techniques such as-
 Margin Analysis
 Constraint analysis
 Capital budgeting
 Inventory valuation and product costing
 Trend analysis and forecasting
1. Margin Analysis- Marginal analysis is done to examine the additional benefits of an activity
compared to addition cost with the same activity. Organization uses marginal analysis as
decision making tool. Decision making tools help organization in maximizing profits. Margin
analysis report is used as a report which gives information about the revenue, cost of goods
sold and gross profit margin. Detailed report of marginal analysis gives information about
customer, order and line number. For example- Cost to produce one more product or profit
earned by adding one more workers.
It is widely used in microeconomics. The main goal of marginal analysis is to determine that
cost associated with the change in activity will result in additional benefit or not. Marginal
analysis do not focus on output as whole it focuses only on product cost and benefit associated
with it.
2. Capital Budgeting- Capital budgeting is used by organization before investment in project. .
Construction of new plant or any large scale investment requires capital budgeting method.
This process involves analysis of cash inflow and cash outflow that would be able to meet
expectations or not. Major methods include discounted cash flow, payback and throughput
analysis.

Net present value- It is present value of all of your cash flows. In other terms, it is method of
calculating return on investment. It is difference between present value of cash inflows and
present value of cash outflows over a period of time. It is used in capital budgeting and
investment planning to analyze the profitability of projected investment.
Internal rate of return- It is a metric that is used in financial analysis. It estimates the
profitability of investments. It is a discount rate that makes the net present value of all cash
flows equal to zero in a discounted cash flow analysis.
Payback analysis- It is simplest form of capital budgeting analysis. It is a periodrefers to
amount of time it takes to recover the cost of an investment. Payback period is the length of
time investment reaches a break-even point.
3. Inventory valuation and product costing- It is an accounting practice that is followed by
companies to find out the value of unsold inventory stock at the time they are preparing their
financial statements. Inventory works as an asset for the organization. It helps in determining
inventory turnover ratio Which further helps in planning of purchasing decisions.
For example- A shoe business is left with pairs of shoes at the end of the year, the company need
to calculate the financial value and record it in balance sheet. There are three methods of
inventory valuation-
FIFO- FIFO stands for first in first out. Under FIFO whenever company make a sale then the
items will be subtracted from the list first which entered in company first.
LIFO- LIFO means last in first out. It is opposite of FIFO. The last item that enter your company
is first one to leaves.
WAC- This method uses average cost of the product throughout the year. Average cost per unit
can be calculated by total cost by total number of unit purchased during the year.
4. Trend analysis and forecasting- Trend analysis is a measurable method for organization to
analyze future outcomes. It can be used for failure analysis and as an early warning indicator of
impending problems. Trend analysis is a tool for anticipating events. It is used to forecast
market trends, sales growth and inventory levels. Business owners can access variety of
business tools. At basic level, data points can be plotted for visual identification of trends which
shows the relationship between variables and also identify the outliers. These data points can be
converted into moving averages for smooth fluctuations. Organization uses spreadsheet

software by this organization can include more variables in order to predict sales more
accurately and forecast the impact of rising interest rated.
Trend analysis is based on verified data; it can be subjected to scrutiny for validation. More use
of numbers makes analysis interesting. Trend analysis can be checked, updated when required.
Historical data does not provide real picture of an underlying trend. Main problem in
forecasting is to understand the turning points. Turning points are clearly visible but it is
difficult to say that it is aberrations or or starting of new trend.
Long-term projections need more data to support them, and that may not always be available,
particularly for a new business or product line. In any case, the further out one forecasts, the
greater the possibility for error, because the passage of time will inevitably introduce new
variables.
Experts or publications sometimes announce trends for their own purposes, or one may
mistake a temporary change in data as a trend. Trends require consistent change in reliable
indicators over an extended period. One has to rely on information that can't be skewed by
interested parties who might pay people to simulate interest or activity. Checking basic data
such as sales, usage, website traffic or verifiable reviews lets you determine whether you are
seeing a real tend.
Trends often consist of observed data that industry participants extrapolate to predict future
behavior. The observed part of the trend may be factual but the projections are conjecture.
Depending on how much observed data has gone into the analysis and how reliable the
projections are, the claimed trend could be valid or might never materialize. Since you have to
base your planning on real trends, you have to examine claimed trends for actual data, and
separate out the part that is based on observation to determine whether a real trend exists .
Task 2-
In this task, planning tools of management accounting are used. How these tools are important
for an organization. There are various kinds of tools which are used in accounting. Some of the
tools are discussed in detail-

Planning tools in management accounting-
There are various planning tools which are classified into following groups-
 Financial Planning- Main aim of every organization is maximization of profits. This
objective can be achieved by proper financial planning. If financial planning of a business
is not in proper way then it is not beneficial for the organization. Hence, financial
planning is considered as best planning tool in order to achieve business objectives.
 Analyses of financial statement- Financial statements are extracted from the financial
accounting record. It includes- income statement, balance sheet and cash flow statement.
These statements are analyzed from different accounting period. This analysis helps to
know the growth rate of the business. This analysis is done with the help of comparative
financial statements and analysis of ratio.
 Cost accounting- It is method of managerial accounting. With the help of business
accounting organization is able to know the cost of the production by measuring the
variable cost of each production phase as well as fixed cost, such as lease expense. There
are five types of cost which are- fixed cost, variable cost, total cost, semi-variable cost
and marginal cost. Marginal cost is that cost which is calculated when an extra unit is
produced.
 Fund flow analysis- By this analysis, organization is able to know about whether fund is
properly utilized or not. Organization can find out movement of fund from one period to
another. Comparison of fund flow can be done with previous year. Organization knows
about change in working capital and operations funds through this analysis.
 Cash flow analysis- This analysis is used to know the movement of cash from one period
to another. Organization can know about the reason behind the cash balance between two
periods and changes in cash. It analyzes cash from operations and movement of the same.
 Management information system- Effective communication is very necessary for an
organization. Management can design the system through which every employee of the
organization can assess the information and used for discharging their duties.
 Statistical analysis- There are many statistical techniques which work as planning tool.
With the help of variance analysis performance measurement can be done and reason
behind poor performance can be find out. Methods of least square, regression and quality
control can also be done.

 Management reporting- This is the report which is made on the basis of income
statement and balance sheet and it is submitted to the top management. This report gives
the information about strength and weakness of the financial activities. Identification of
strength and weakness is very important as it helps top management in exercising control
and decision making.
 Ratio analysis- Financial performance of a company is analyzed with the help of ratio
analysis. There are various kinds of ratios which gives information about where company
is standing. What kind of changes in financial activities is needed to be done? There are
some popular ratios which are- liquidity ratio, P/E ratio, profitability ratio, efficiency
ratio and solvency ratio.
 Standard costing and marginal costing- Standard costing is a predetermined cost which
provides a yard stick to measure actual performance of the company. It is used to find
deviations if any existed. Marginal costing considers only variable cost.
 Budgetary control- In this technique, financial needs in future are estimated and on the
basis of that budget is made. It is used to control the financial performance of an
organization. So business operations can be done in proper manner.
 Historical Cost accounting - It refers that costs are mainly recorded after the incurred.
This planning tool is used to comparing with the predetermined costs to the performance
evaluation.
 Marginal Costing - This planning tool is work like an effective technique which is
useful to fix the specific selling price, consider the best sales mix, take a buy decision,
good use of the scarce raw resources or materials. This planning tool is totally based on
the fixed cost, variable cost & contribution (Mitter and Hiebl, 2017).
Task 3-
This task focuses on how efficiently planning tools work to solve financial problems within an
organization. Planning tools plays an important role in organization as it helps in solving various
kinds of financial problems.

Solving Financial Problems through planning tools-
Planning tools are proving various benefits to the company in solving thespecifc financial related
problems indifferent functions of the business that these functions can make very suitable. Some
specific way discussed below-
 Planning-Planning tool is helpful to maintain the different aspects of the business so that
company can effectively align the specific future operations with the help of strategic
goals so that company can maintain the budget. This can helpful to make the company
more suitable.
 Controllingandmonitoring-This tool is all about control and also monitor the business
operations and maintain the different cost with the help of variance analysis.
 Competitiveadvantages-This tool is mainly concerned about the maintain specific
process so that company can obtain more competitive advantages with the help of
efficient management resources (Cescon, Costantini and Grassetti, 2019).
Some another planning tools also discussed which can helpful to solve the financial problems.
 Variance Analysis- It can be understood as set of data which is available for business to
compare pre-budgeted standards with real outcomes. This tool can be used for financial
and non- financial aspects. It is widely used tool. It helps in determining efficiency of
organization and accuracy of budgeting.
Advantage- Main advantage of this tool is, highly effective in performance evaluation
and elimination of financial problems. With the help of this tool business can control its
unnecessary expenses.
Disadvantage- In order to use this tool detailed market research and financial data is
required as well as knowledge of financial items is required.
Major factors which create financial problems are lack of efficiency and improper
planning. Both of these factors can be eliminated by using variance analysis. For
example- In an organization employee performance is the primary concern. Employee
performance affects the overall profitability of the company. This problem can arise due
to lack of monitoring and lack of training. This problem can be avoided by using
variance analysis. This tool examines monetary as well as non-monetary data. With the
help of this tool budgeted data is compared with real outcomes that further helps in

eliminating the factors of low performance. Comparison of departmental performance
can be done with the help of variance analysis.
 Cash budget- Cash is the most crucial issue of the business. It is related to working
capital requirements. Shortage of funds effect the sustainability of business. It is a part of
budgeting activities. These activities are performed by a company to evaluate the future
financial figures by analyzing the recent trends.
Advantage- With the help of this tool an advanced and diversified strategy can be made
for future cash shortages. It also helps in resource distribution among departments.
Disadvantages- It has less accuracy as it is based on the estimates. Adoption of cash
budget is also affected by corporation among staff.
If cash resources are unavailable then business may face problems related to operations.
For example- Cash unavailability may affect the continuity of beneficial segment and
leads to heavy operational losses. This problem can be solved by using cash budget.
Budget represents the structure of cash inflow and cash outflow so that applications of
cash funds can be measured correctly. With the help of cash budget, resource allocation
can be done in proper manner and cash unavailability can be solved within specified
time.
Conclusion-
In the above report, it is learned that management accounting is very important for an
organization. Management accounting helps organization in decision making. Management
accounting not only increase the efficiency of decision makers but also employees. Proper
management should be implemented. Decision making is very important for organization. There
are various planning tools and techniques as well which help organization in growth.
Organization should use planning tools to eliminate the financial problems. Thus, it can be said
that functioning of business cannot be done properly without management accounting.

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