Management Accounting: Principles, Systems, and Applications

This report explores the fundamental principles and concepts of management accounting, examining its role in supporting organizational decision-making. It delves into various management accounting systems, including cost accounting, job costing, inventory management, and price optimization, analyzing their benefits and essential requirements. The report further investigates different methods used for management accounting reporting, highlighting their integration within organizational processes. It also demonstrates the application of cost analysis techniques, such as marginal and absorption costing, in preparing income statements. The report concludes by examining how organizations adapt management accounting systems to respond to financial problems and achieve sustainable success.

UNIT – 5 Management Accounting
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Contents
Introduction:....................................................................................................................................3
P1: Explain management accounting and give the essential requirements of different types of
management accounting systems.................................................................................................4
M1: Evaluate the benefits of management accounting systems and their application within
an organizational context..........................................................................................................6
P2: Explain different methods used for management accounting reporting................................7
D1: How management accounting systems and management accounting reporting are
integrated within organizational processes...............................................................................8
P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing........................................................................9
M2. Apply a range of management accounting techniques and produce appropriate financial
reporting documents...............................................................................................................10
D2. Produce financial reports that accurately apply and interpret data for a range of business
activities..................................................................................................................................13
P4. Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.......................................................................................................................14
M3. Analyse the use of different planning tools and their application for preparing and
forecasting budgets.................................................................................................................15
P5: How organizations are adapting management accounting systems to respond to financial
problems.....................................................................................................................................16
M4: How, in responding to financial problems, management accounting can lead
organizations to sustainable success (D3)..............................................................................17
Conclusion:....................................................................................................................................18
References:....................................................................................................................................19
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Introduction:
The report of management accounting is prepared for making understand the users about the
fundamental principles and concepts related to management accounting and the systems which
are used in this function. In order to prepare this report the company Zylla has been taken into
consideration which is one of the largest companies operating in UK and having variety of
operations in the business sector. The company has gone into number of changes which required
the type of restructuring and merger programmes and this has resulted in adoption of new
technology in accounting so that adequate information can be made available to the management.
The report will include the explanation about various systems of management accounting along
with the presentation of some financial statement and reports concerned. The use of various
planning tools in responding to problems and adequately forecasting and budgeting the cost
expenses will be demonstrated in this report.
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P1: Explain management accounting and give the essential requirements of different types
of management accounting systems.
Management Accounting:
The concept of management accounting can be defined as the system adopted by management of
the company in order to collect, record and present the information related to financial as well as
non-financial aspects of the company which can assist in decision making function. The type of
information provided in management accounting reports helps the managers in evaluating and
analysing the situation of the company and taking the significant economic decision regarding
future course of action (Höglund, et. al., 2016).
It has been observed that before the period of late 1990 there were no proper set of requirements
for value added reporting and the information to be presented in the data format for economic
decision making but after the industrial revolution which was experienced in 1990 management
accounting evolved as a necessary tool, for obtaining the value added reports and necessary
information so that decision regarding the restructuring and corporate investment can be taken
appropriately and correctly.
Difference between management accounting and financial accounting:
Management accounting Financial accounting
The concept of management accounting is
related with providing adequate information to
the management for decision making.
The concept of financial accounting is to
generate the financial statement at the end of
period.
The accounting reports covers the matters
related with financial as well non-financial
aspects of the company.
The matters and reports are related with only
financial items of the company (Osita, et. al.,
2014).
The preparations of these types of reports are The preparations of these reports are
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not required and necessitate by any law or
regulation.
mandatory for a listed organisation.
The users are associated with internal parties of
the company.
The users are associated with external parties
of the company.
Management accounting systems along with their essential requirements:
Cost accounting system – The cost accounting system of the company can be represented as the
system in which the various items of costs are classified separately and the same will help in
income recognition and preparation of financial statements of the company (Rothaermel &
Frank, 2015).
Essentials:
 The basic requirement for effective financial reporting is to integrate the system of cost
accounting with the financial accounting system of the company.
 The management should involve in regular stock taking in order to recognize the correct
cost of products.
Job costing system – The job costing system of the company is related with identifying the
specific jobs on the basis of customer orders and then recording and classifying the cost
associated with each of these separate jobs of the company (Osita, et. al., 2014).
Essentials:
 The job costing system should be appropriate for cost plus contracts obtained by the
company.
 The allocation of various indirect cost associated with different jobs must be on an
appropriate basis.
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Inventory management system – The inventory management system of the company is
associated with managing the stock position of the company and optimizing it up to an
appropriate level.
 The proper method of stock valuation concerning with FIFO, LIFO or Weighted average
should be applied in the company.
 The effective physical stock taking must be applied in the company.
Price optimization system – The system is related with identifying the appropriate pricing
levels for selling the products and services of the company in the market for achieving better
profitability and sustainability.
 The accurate estimation of demand and supply related with customers are required.
 The data acquired must be accurate in order to avoid losses (Otley, 2016).
M1: Evaluate the benefits of management accounting systems and their application within
an organizational context.
Effective decision making – The Company Zylla is in the expansion phase and requires taking
effective and accurate corporate restructuring decision which can only be possible with adequate
and correct amount of information which will be provided by the management accounting
systems.
Increasing the efficiency of operations – The systems of management accounting helps the
management in analyzing the current situation and identifying the deficiencies associated with
current level of operations. The same will allow the company to frame appropriate strategies in
order to implement solution and achieve efficiency in operations of the company.
Cost control and profitability – The various techniques applied in management accounting
system helps the company in implementing the cost control techniques and this will result in cost
reduction and increase profitability will be achieved for Zylla Company (Rothaermel & Frank,
2015).
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P2: Explain different methods used for management accounting reporting.
The various types of reports that can be used in management accounting reporting are:
Reporting Description
Cost and revenue reports The cost and revenue are related with
recording and presenting the information about
the various items of costs and revenues during
the period of operations of the company and
the same is utilized to prepare the income
statement of the company (Otley, 2016).
Budgeting reports The budgetary reports of the company are
related with establishing the targets budgets of
the company associated with cost and
comparing the actual, results in order to find
out the variances associated.
Inventory reports The inventory reports of the company are
represented as the reports which contain the
information about the flow of inventory in the
supply chain and manufacturing process of the
company. The data related to economic order
quantity and economies of scale will be
presented in this report (Höglund, et. al., 2016).
Investment appraisal reports The type of reports are require for long term
decision making in which the techniques like
NPV, IRR are utilized for evaluating the
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returns and payback time for the company. The
information will help the users in accepting or
rejecting the proposal in front of the company.
D1: How management accounting systems and management accounting reporting are
integrated within organizational processes.
The effective integration between the organizational process of Zylla Company and various
system of management accounting will be required in order to achieve overall development of
the company. The integration can be achieve by aligning the objectives associated with each of
the system with the individual processes of the organisational and effectively communicating the
results to the managers of each department. The understanding of data reported in each of the
system is of very much importance in order to acquire the sound integration between them
(Granlund & Lukka, 2017).
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P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing.
The various costing techniques applied in management accounting helps the company in making
cost volume analysis and this will require various types of information about the direct as well as
indirect costs associated with the company. The various types of technique which can be applied
by the company in analysing the cost structure are presented below:
Absorption costing – The absorption costing technique is relate with full cost accounting in
which overall cost of manufacturing the product will be included and utilized for preparing and
presenting the cost statements of the company. The fixed overheads of the company will be
allocated and absorbed on the basis of predetermined overhead rate acquired by the company.
The absorption costing technique is suitable for preparing the financial reports of the company
and shows the actual picture of income and expenses of the company (Granlund & Lukka, 2017).
Marginal costing – The technique of cost accounting represents the modern technique and only
variable cost of production which is incurred in production operations are utilized for
recognizing the contribution acquired by the company. The fixed overhead in this technique are
written off against the profit and loss acquired by the company in the form of contribution. The
type of costing technique is suitable in decision making purposes as the relevant cost id
identified and taken into consideration while making decision about accepting or rejecting the
proposals.
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Marginal
costing
Absorption
costing

M2. Apply a range of management accounting techniques and produce appropriate
financial reporting documents.
XYZ Ltd. presents the monthly information as presented below for the month of July:
Selling price is £35 per unit and sales were 1500 units while production was 2000 units.
Calculate cost using absorption and marginal costing.
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Income statement as per marginal costing for the month of July for XYZ Ltd.
Working Note:
.
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Income statement as per absorption costing for the month of July for XYZ Ltd.
Working Note:
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D2. Produce financial reports that accurately apply and interpret data for a range of
business activities.
Reconciliation statement:
Working Note:
Analysis: The difference in profits is obtained due to the difference in treatment of overhead
relating to fixed manufacturing cost of the company. The same has resulted in under absorption
of the overheads.
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P4. Explain the advantages and disadvantages of different types of planning tools used in
budgetary control.
The types of planning tools which can be used in management accounting for budgetary
planning purposes are relate with variable analysis, standard costing and responsibility
budgeting. These types of tools provide management with the required set of information that
should be adequate for budget establishment and implementation (Arjaliès & Mundy, 2013).
Variance analysis – The variance analysis is a planning tool used for performance measurement
and determining the extent of appropriateness with which the operations has been conducted in
an enterprise. The variances are calculated after comparing the actual results with the budgeted
items of the company.
Advantages Disadvantages
The variance analysis technique is effective in
controlling cost and other expenditures.
The process of variance analysis is time
consuming and as a result lot of efforts are
required in this direction.
The budgets are more accurate as the same are
created after considering the variances
obtained in this tool.
If the variance results are accurate it will
directly impact the budgets established.
Standard costing – The costing technique which requires various cost standards to be
established by the company and then making them utilize the budgetary targets in order to have
effective cost implementation in the company is known as standard costing (Bromwich &
Scapens, 2016).
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Advantages Disadvantages
The same represents the most effective tool in
budgetary process of the company.
The standards require subjectivity in their
creation and therefore there can be inaccuracy.
The standards established helps in analysing
the various budgetary targets for their accuracy
and correctness.
The various behavioural implications can cause
dissatisfaction among the employees.
Responsibility budgeting – The responsibility budgeting tool is associated with creating the
various accountabilities of different managerial persons at various departments of the company
in order to have an effective performance measurement system (Anderson, et. al., 2015).
Advantages Disadvantages
It helps in encouraging and motivating
employees for achieving better results.
The confusion may arise due to complexities in
processes.
The budgets can be related and made
accountable for different departments
The long term results are ignored in this tool.
M3. Analyse the use of different planning tools and their application for preparing and
forecasting budgets.
The different planning tools are related with performing the basic functions of management
which are associated with controlling through forecasting the desired objectives and targets of
the company and making strategies in order to perform the operations efficiently and effectively.
The use of these planning will ensure that the company utilizes the results of these tools in
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making plans for future and defining the required set of actions in budgetary process of the
company.
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P5: How organizations are adapting management accounting systems to respond to
financial problems.
The organizations operating in wider business environment are exposed to different types of
risks which can be crucial for continuous operations of the company. The various financial
problems which are recognized in modern business organization are related with cash
management and fund management of the company. The other problems are associated with
managing the inventory of the company and controlling the inventory obsolescence and wastages
(Bromwich & Scapens, 2016). In order to solve these problems various techniques of
management accounting can be applied in the company which are as follows:
Benchmarking – The establishment of a benchmark which is regarded as the execution standard
obtained by the company by referring to the industry targets and market conditions helps the
management in paving their way for performing the required level of process in an efficient way
and obtaining the desired benchmark. Also if any deficiency is identified in this process the
company will be able to solve the same in regard to achieve maximum profitability and
sustainability.
KPI – The key performance indicator will be regarded as the ratio analysis targets of the
company in which the financial ratios wile b determined and the KPI will be identified in order
to achieve the crucial business operations effectively and efficiently. The identification of KPI
will help the company and management in defining the standard set of skills and the deficiencies
will be soughed out accordingly (Arjaliès & Mundy, 2013).
Non-financial KPI’s:
 Change in cost structure
 HRM and employee turnover Ratio
 Quality related KPI’s
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Financial KPI’s:
 Profit margin ratios
 Operating ratios
 Liquidity ratios
M4: How, in responding to financial problems, management accounting can lead
organizations to sustainable success (D3).
The various types of analysis provided in the management accounting system will help the
company to identify the key factors which can lead the company towards achieving a
competitive edge in the market while achieving the maximum profitability. The techniques like
SWOT analysis, PEST analysis can identify the major weaknesses and strengths of the company
in regard to the major threats associate with expansion and restructuring. Therefore the use of
management accounting techniques will allow the management in analysing the most appropriate
situation and skills required which will help in performing the functions efficiently and
effectively (Anderson, et. al., 2015).
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Conclusion:
It can be concluded that the company Zylla requires adopting an efficient system of management
accounting in order to improve the existing processes and operations of the company and
acquiring a large extent of market by its expansion and restructuring activities. The adoption of
various management accounting system and costing techniques will provide adequate and timely
information to the users of the company and this will help them in taking correct decision
regarding the company. The adoption of marginal and absorption costing technique will help the
management in producing appropriate income statement which requires proper reporting and
recording. The adoption of various tools of planning will ensure that the budgetary control
implemented in the company is working efficiently and the staff and employees of the company
are performing efficiently and effectively. This will help in achieving competitive edge and
advantage in long run.
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