Management Accounting Principles and Systems - Desklib

This report explores the role, methods, planning tools of management accounting systems. It outlines principles and types of management accounting systems. It also gives types of managerial reports.

Management accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Role of management accounting.................................................................................................3
Management accounting system and its role .............................................................................3
Evaluating management accounting systems and management accounting reporting is
integrated within organizational processes.................................................................................4
Principles of management accounting........................................................................................4
Calculating costs using marginal and absorption costing and preparing income statement.......4
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is the study of maintaining reports about business activities that
help the top-level management in order to make long term and short term business decisions. By
identifying business goals and strategies the managers of company make better and evidence
based strategic decisions. The case study will give detailed information about Sollatek, UK, the
manufacturing company deals in tubes and valves. The report will explore role, methods,
planning tools of management accounting systems. Further the case study will outline principles
and types of management accounting systems. In addition to this, the present report will give
types of managerial reports.
Management accounting
It is the presentation of accounting related information to management of the company in
order to formulate the various business policies and assist in it daily business operations (An
overview of management accounting, 2021). It also means that it helps the managers to performs
all business related function including organizing, planning, controlling, budgeting. The main
objective is to avoid errors and minimize losses in order to make profit, it will ultimately
increase productivity.
Role of management accounting
The most important role is to analyse cost to determine the existing company expenses
and give relevant and proper suggestions for the future requirement and business activities
(Mahmoudian and et.al., 2021). After cost and budget analysis, the management team of the
company can make decisions which is beneficial for the firm. In order to direct financial
processes the managers of the company identifies past trends and predict future requirements for
decision-making process related to spending, budget, costs and sales.
Management accounting system and its role
The systematic process of control used by management team in order to influence
members to achieve business goals and objectives within the company (Massicotte and Henri,
2021). The company uses this system to save time and costs as it improve financial visibility and
develop asset and inventor management. A major importance of this system is that it gives high
flexibility and enhance decision-making process and minimizes various errors in terms of
accounting.

Role- This system plays a vital role in forecasting future business needs and for making plans
such as strategic management accounting and market study. With the help of this system, the
management team can analyse and maintain reports such as cash flow statements, liquidity and
others.
Evaluating management accounting systems and management accounting reporting is integrated
within organizational processes.
 This system and process helps managers to make business decision with the help of
budgeting in order to control unnecessary control (NGUYEN and NGUYEN, 2021).
Comparing the budget to actual expenses to evaluate the financial information.
 It provides brief information of company's resource flow and divides what is beneficial
and detects errors to form long term strategies to measure health of organization and on
the basis of that make effective production and budget decisions.
Principles of management accounting
Compiling and designing- In order to meet the requirements of business, the firm should
design and compile the accounting reports and statements with respect to past, present and future
results (Maheshwari, Maheshwari and Maheshwari, 2021). The sollatek must design reports of
accounting in such a way including relevant business and cost data which can be modified in
order to meet the needs of organization.
Accounting for inflation- The company cannot earn profit unless capital is maintained in
real terms. So, it is important to measure the value of capital contributed by higher level
managers, owners and promoters in terms of real value of money. Therefore, in this way the rate
of inflation is taken into consideration by company in order to judge the performance and
potential of the business.
Calculating costs using marginal and absorption costing and preparing income statement
Marginal Costing
It is a technique of cost accounting where marginal cost which variable cost is completely
charged to the units of cost whereas fixed cost are duly written off against the contribution
(Asadullah and et.al., 2018). Marginal cost is the change in total cost when one extra unit of an
item is produced. The formula for marginal costing is as follows:
Direct material + Direct labour + Direct expenses + Variable overheads

Marginal costing is used to acknowledge the effect of variable cost on the production
volume. Break even analysis forms an important and integral part of marginal costing. It s very
important to form a base for valuation of stocks of finished goods and WIP.
Income statement
Contribution = Selling price – Marginal cost
or, Fixed expenses + Profit
Particulars Amount (£) Total (£)
Sales 3000000
Less: Variable costs
Cost of goods manufactured 1500000
Variable selling expenses 500000
Variable Administration expenses 100000 2100000
Contribution 900000
Fixed Administration expenses 90000
Fixed Selling expenses 150000 240000
Total income 660000
The advantages of using marginal costing are as follows:
 Marginal Costing is a simple method to operate and understand.
 It is very much helpful in profit-planning by determining profitability at all levels of
productions (Hamian and et.al., 2018). At the time of fixing selling price and taking decisions like make or buy, marginal costing
is very much beneficial to the company.
Absorption Costing
It is system of cost accounting which s used for valuation of inventory and includes not
only cost of material and labour but also fixed and variable costs (Moisello and Mella, 2020).
Absorption costing is also known as full costing because it calculates all the cost related to

production such as direct labour, material, rent, security and insurance expenses, electricity
charges, etc.
The absorption cost per unit of product is as follows:
Particulars Amount (£)
Direct material 15000
+ Direct labour 16000
+ variable overheads 8000
+Fixed overhead 9000
= Total product cost 48000
/ Total units produced 12000
= Product cost per unit 4
Income statement using absorption costing
Particulars Amount (£) Total (£)
Sales (10000 * 6) 60000
- cost of goods sold (10000 * 4) 40000
= Gross Profit 20000
Operating expenses
Selling expenses (11000 fixed + variable 0.20 *
10000)
13000
+ General and administration expenses 5000
= Total Expenses 18000
= Net operating income 2000
The advantages of using absorption costing are as follows:
 The major advantage of using absorption costing is that it complies with GAAP which is
needed for Internal Revenue Service (IRS).

 It takes into account all the costs and not just direct costs as is the case with marginal
costing (Annen, 2017).
 This costing system gives more accurate picture of profitability especially when all that is
produced is not sold within a particular year.
Difference between management and financial accounting
Financial accounting Management accounting.
 In order to create financial statements,
the sollatek, Ltd uses financial
accounting as it is a collection of
accounting data.
 It provides right and relevant
information to the stakeholders to make
decisions.
 The major focus of financial accounting
is disclosure to top management team
in the firm (Lee, 2020). The reports are
being prepared is useful to customers,
banks and suppliers etc.
 Generally, the time horizon is past such
as one accounting year in financial
accounting.
 Financial accounting systems provides
financial information which gives an
idea about health of business.
 The accounting system is managed by
company in order to make business
decisions as it is internal process used
to accounts for daily business
operations.
 The system utilized by top management
team in brining effectiveness in the
company's transaction.
 The management accounting focuses on
giving information about financial
health of business and providing
suggestion for necessary improvements.
 The focus is on the future as it has no
specific time horizon for management
accounting.
 The reports are being prepared is useful
to parties such as CEO, directors and
top-level managers, promoters.
 It is being prepared for financial and
non-financial information which can be
used by management while making
decisions.
Types of management accounting systems

cost accounting systems- It is the system used to estimate the product costs for
profitability analysis, cost control and inventory valuation. The major role of cost accounting
system is to lower the cost of the business transaction in order to make profit. By controlling
relevant items in the company, will help to improve profit maximization. Sollatek ltd uses this
system to make good costing system by ensuring proper accounting for labour, overheads and
materials.
Benefits- using this system will benefit the company to minimize wastage and determine the
selling price of products (Mishra, Wu and Sarkar, 2021). Cost accounting system calculate the
profit and loss made on each product in the company in order to make profitability. It provides
data related to cost that helps in fixing prices of products and services.
Inventory management systems- It is the system in which the company keep track on
goods throughout their entire supply chain (Muller, 2019). It gives information about inventory
management approaches in the business. The process provides a real time view of inventory
across all selling channels in the company. Sollatek ltd uses ERP method of inventory
management that is enterprise resources planning which allows to manage all activities of their
business including finance, logistics and planning.
Benefits- it beneficial for company because it helps to manage multiple locations and stock outs,
keep proper records of stock (Wild, 2017). This system reduced risk of overselling to control
unnecessary expenditure. It improves business negotiation for cost savings while making
inventory related decisions. The system helps to minimize stock outs and excess stock in order to
simplify inventory management so that company can take inventory control decisions.
Job costing systems- This system is utilized by company to keep track on cost of
materials that are used during course of the job and provides information about them. The
sollatek ltd can use this process for determining if the job is profitable or not.
Benefits- The system provides analysis of the labour, overhead and materials for each job in the
company. It will be useful for accounting system in company because it can easily keep record
on all expenses on daily basis.
Price optimizing systems- This system 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 (Liu and Sustik, 2021). It is mathematical process
that can calculate about the demand of products at different price levels. The company combine

that important data with inventory levels in order to suggest prices that will ultimately increase
profit margins.
Benefits- customers are more attracted to pick up on products when they feel priced optimally
so, the company utilize this method to maximize its sales and profits. The best price of product
will allow company to achieve potential.
Presenting financial information-
 It is important to provide financial and accounting information on time and accurate in
order to make business decisions (Ramachandran and Kakani, 2020). In the presence of
reliable information and details, organization can make better decisions, it will be able to
help other employees to make productive decisions.
 The information provided in the financial accounting and management accounting must
be easily understandable and explicit by their users. The proper information must be
presented in effective way that the users do not get confused while making any relevant
decisions. Additionally, too much use of confusing statement must be avoided and easy
language must be used. In order to identify trends in performance the company can
compare with same information.
 If the information provided in financial statements becomes complicated for the users and
unable to read properly, then the purpose of making business plans weakens. The
accounting information is reliable if it is free from material error and wrong details. In
addition to that, increasing the relevance of financial information includes maximizing
the confirmatory value so that any error can be avoided by the user.
Types of reports
Cost accounting report-This method includes information of provider such as data
utilization, charges and cost by centre. The report is helpful to keep the customer informed and
help them to control costs (Zhao, 2020). The report is utilized by firm to determine the cost per
equivalent unit in the project. Profit margins and unnecessary expenditure are estimated with the
help of cost report in the management accounting systems.
Budget report- In order to make proper list to know past estimated budget over a time
period the company utilizes this method. A company's budget report shows all the profit and loss
to measure the financial or actual position. If the company's budget report is well-designed then
it will be easy to achieve target (Loft, 2020). In the firm the budget report is also maintained to

provide incentives to employees that motivated them to achieve success. This method is used by
managers within the company to compare the estimations of budget with the accurate results
achieved during the business activities.
Account receivable Aging report - This method is adopted by sollatek ltd manager to
show the invoice balances which is unpaid with the time period they have been outstanding. The
firm can layout credit and selling practices within business activities. It keeps track on slow
paying clients for the business operations (Dutta, Paitya and Majumdar, 2020). The firm used
this method to attain detailed analysis of problems associated with company collection process.
The company is suggested to identify and measure irregularities in the report and improve
efficiencies.
Inventory report- This method used to know about how much stock the firm have, its
performance in the competitive market, the fastest selling products and also inventory
performance within the company (Inventory management systems, 2021). It is said by managers
of sollatek that manufacturing process can become more effective and efficient with the help of
this method. Additionally, the inventory report also shows comparison between different
assembly lines and find out the opportunities for development to attain required target and goals.
Proper and well-organized inventory reports can show over-ordering inventory to keep track
budget and control it in order to reduce uncertainty.
Performance report- This method is adopted by company which shows them overall
departmental reports to make strategic decisions (Al-Dmour, Zaidan and Al Natour, 2021). The
firm keeps an accurate measure of its financial strategy. In addition to that, management must
determine the evaluation of competitor analysis and its marketing strategy. To attain the most
effective financial decisions the company must have authentic managerial accounting report.
CONCLUSION
To conclude, management accounting provides detailed information about finance and
resource flow so the company could meet its future requirements and make statistical decision on
time with the help of actual data. By separating benefits of using this system and detects flaws
the company can take long term approaches to measure its business standards. More importantly,
the company must focus on presenting financial information in such a way that it should be
reliable and accurate. With the present report, it is concluded that the company must focus on
inventory and budget management to avoid any unnecessary expenses and avoid excess stock to

maintain its budget. At last, the report summarized that company needs to compare budget to
actual expenditure happens in the company.

REFERENCES
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An overview of management accounting. 2021. [Online]. Available through:
<https://www.accounting.com/careers/management-accounting/>
Inventory management systems. 2021. [Online]. Available through:
<https://www.unleashedsoftware.com/inventory-management-guide/inventory-
management-systems>