Management Accounting: Principles, Systems, and Planning Tools

This report delves into the fundamental concepts and principles of management accounting, focusing on their application within a medium-sized manufacturing company, IMDA Ltd., specializing in antique items. The report examines various management accounting systems, including cost accounting, inventory management, job costing, and price optimization, evaluating their benefits and essential requirements for IMDA Ltd. It further explores different management accounting reporting methods, such as budgeting reports, departmental reports, cost and sales reports, and investment appraisal reports, highlighting their integration within organizational processes. The report also analyzes the application of cost analysis techniques, including marginal costing and absorption costing, to prepare income statements for IMDA Ltd. Additionally, the report investigates the advantages and disadvantages of different planning tools, such as standard costing, variance analysis, and responsibility budgeting, for budgetary control. It examines how organizations adapt management accounting systems to respond to financial problems and how management accounting can lead organizations to sustainable success, with a specific focus on IMDA Ltd.

UNIT: 5 – Management Accounting
1

Introduction
The report prepared in the concerned assignment of management accounting is related to the
basic concepts and principles of management accounting which are mostly applied in the current
business scenario. The first part of the report includes the preparation of a report in which the
various types of management accounting systems and their requirements will be explained in
context of the organization that has been chosen among ten manufacturing and medium sized
enterprise of UK. The reporting methods used in management accounting reporting will be
correctly described in this report along with the calculations to be presented for the income
statement of the company by applying absorption and marginal costing methods. The second part
of the report will be written report which is associated with description of various items of
planning tools which can assist in planning and budgeting function of the organization. The use
of planning tools will be described in the context of solving financial problems and ensuring
sustainability in the market.
2

Contents
Introduction......................................................................................................................................2
Task 1&2.........................................................................................................................................5
Introduction..................................................................................................................................5
P1. Explain management accounting and give the essential requirement of different types of
management accounting systems to the chosen scenario giving examples.................................5
M1 Evaluate the benefits of management accounting systems and their application within an
organizational context for the chosen scenario............................................................................6
P2. Explain different methods used for management accounting reporting that can also be used
for the chosen scenario.................................................................................................................8
D1 Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes for the chosen scenario.........................8
P3 Calculate cost using appropriate techniques of cost analysis to prepare an income statement
of marginal and absorption costing............................................................................................10
M2: Accurately apply a range of management accounting techniques and produce appropriate
financial reporting documents....................................................................................................11
D2 Produce financial reports that accurately apply and interpret data for a range of business
activities.....................................................................................................................................13
Conclusion.....................................................................................................................................13
Task 3.............................................................................................................................................14
Report.........................................................................................................................................14
Introduction................................................................................................................................14
P4. Explain the advantages and disadvantages of different types of planning tool that can be
used for budgetary control for the chosen scenario...................................................................14
M3: Analyse the use of different planning tools and their application for preparing and
forecasting budgets with special reference to the chosen scenario............................................16
P5: Compare how organisations are adapting management accounting systems to respond to
financial problems......................................................................................................................18
M4: Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success with special reference to your chosen scenario (D3).......19
Conclusion.................................................................................................................................20
Conclusion.....................................................................................................................................21
References......................................................................................................................................22
3

Task 1&2
Introduction
The report is prepared in order to give users an understanding of the basic principles and role of
management accounting and its systems in the organization IMDA Ltd. which is medium sized
manufacturing company engaged in manufacturing antique items. The reporting method applied
in the management accounting system along with various cost reports will be presented in this
report.
P1. Explain management accounting and give the essential requirement of different types
of management accounting systems to the chosen scenario giving examples.
Management accounting is the function of management which is concerned with sound decision
making related to the future and long term strategic decision making often company. The
management accounting function involves identification of various types of information
including qualitative as well as quantitative information and the information to be presented in
the data format in the management accounting reports (Morris, 2017). The various types of
management accounting systems are:
Cost accounting system – The cost accounting system is the system which involves recording
and classifying the various types of cost information related to a product in the manufacturing
company. The essential requirements include:
 The cost items must be classified adequately and correctly in order to arrive at the
accurate results.
4
Management
accounting
systems
Cost
accountin
g system
Job
costing
system
Inventory
manage
ment
system
Price
optimisa
tion
system

 The costing system of the company must be aligned with the financial reporting system
of the company in order to get financial reports (Tabitha & Ogungbade, 2016).
Inventory management system – The inventory management system is concerned with
optimizing the stock to be maintained in the company while ensuring the reduced carrying cost
and holding cost of the inventory lying in the company. The essential includes:
 The system must enable the managers to achieve economies of scale.
 The appropriate inventory level must be achieved after considering all the factors
influencing the determination of inventory.
Job costing system – The job costing system is related to the cost classification and cost
ascertainment of the particular job or process in the company. The system of accounting is
closely linked with batch costing system. The essential includes:
 The indirect cost must be ascertained carefully and allocated on a reasonable basis.
 The classification of jobs should be based on customer orders received.
Price optimization system – The price optimization system is the process in which appropriate
selling prices are determined based on the demand and supply of the product which is recognized
by these reports. The essentials include:
 The demand and supply pattern must be carefully noted and recorded in this system.
 The prices must be reasonable in order to achieve higher profitability (Bragg, 2016).
5

M1 Evaluate the benefits of management accounting systems and their application within
an organizational context for the chosen scenario.
Requirements of management accounting system in IMDA LTd. are pointed as under:
 Cost reduction and control – The management accounting systems like cost accounting
system and inventory management system will help IMDA Ltd. in reducing the cost by
efficiently applying the cost control measures in the company. This will help in achieving
higher profitability.
 Increase in efficiency and productivity – The productivity and efficiency in operations
will be enhanced by applying the qualitative measures which have been recognized through
standard costing, budgeting and variance analysis process of management accounting.
 Helping in making estimates – The forecast activity in the company IMDA Ltd. can be
smoothly conducted by utilizing the information presented in the various reports of managing
accounting system. This will help in overall growth and development of the company and
expand globally (Morris, 2017).
6

P2. Explain different methods used for management accounting reporting that can also be
used for the chosen scenario.
The different types of reporting that can be used in management accounting system of IMDA Ltd
are presented below:
Budgeting reports – Te budget reports of the company are associated with preparing budgeted
cost expenditures to be incurred during the period and producing them variable analysis report in
order to improve the performance. The same can be used in IMDA Ltd for formulating different
plans and strategies and expanding as per the objectives and goals of the company (Bragg, 2016).
Departmental reports – The departmental reports are concerned with the organization which
has decentralized system of operations and activities are carried out in different departments of
the company. The departmental reports can help in classifying the various cost and revenue items
of the different departments and making the decision about the future operations concerned with
those departments of the company.
Cost and sales report – The report includes the information about the sale and cost incurred
during the period and can be useful in deciding the level of activity be performed in the company
in the future. The manufacturing operations of IMDA Ltd can be controlled by obtaining unit
cost of product and providing value added reports to the management for taking costing
decisions (Legaspi, 2014).
Investment appraisal reports – The Company IMDA Ltd is in the phase if developing and
requires investment appraisal reports in order to compare and evaluate the long term business
proposals that can bring profitability to the company. The techniques like NPV, IRR and other
technique helps in evaluating the long term proposals.
D1 Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes for the chosen scenario.
IMDA Ltd a medium sized manufacturing company of antique items is concentrating to expand
its business and in that process, it is facing certain financial as well as non-financial problems
which require proper reporting process. The integration between different systems and processes
can be achieved by effectively recognizing and aligning the system objectives with the
organizational processes of IMDA Ltd and effectively communicating these objectives to the
departments and the associated managers of the company (Aleem, et. al., 2016.).
7

P3 Calculate cost using appropriate techniques of cost analysis to prepare an income
statement of marginal and absorption costing.
The cost incurred in the manufacturing process of the organisation represents the different types
of amounts incurred for producing the product or service of the company. These costs are
classified into:
Variable cost – The variable cost of the company represents that part of the expenditure which
directly varies with the level of activity performed in the company. The variable costs are
relevant in decision making purposes (Tabitha & Ogungbade, 2016).
Fixed cost – The fixed cost represents the portion of cost incurred by the company which
remains fixed with the level of activity performed and does not vary with the level of production
in the company.
The various type of costing technique applied in the company is:
Marginal costing – The marginal costing technique is associated with innovative method cost
accounting in which the marginal cost is calculated after considering the variable cost of
production and utilizing the break even analysis and the cost volume analyse to perform decision
making in the company. The income statement in marginal costing is prepared after recognizing
the contribution achieved by the company.
Absorption costing – The absorption costing technique is the conventional and the traditional
method of cost accounting in which all the cost incurred in the process of production whether it
is variable cost or fixed cost production is considered for calculating the unit cost of product and
the same is used for decision making purposes (Tabitha & Ogungbade, 2016).
8

M2: Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents
The income statement of the company IMDA Ltd prepared on the basis of marginal costing is
presented below:
Working note:
The income statement of the company IMDA Ltd on the basis of absorption costing is presented
below:
9

Working Note:
Unit Product cost
Particular Amount (in £)
Direct material 6
Direct labor 5
direct expenses 3
Fixed overheads (1800/600) 3
Unit product cost 17
D2 Produce financial reports that accurately apply and interpret data for a range of
business activities
The net profits under both the methods is different because of the treatment of fixed overheads
incurred in the company and the same has been written off in the marginal costing but the same
has been absorbed in absorption costing.
10

Conclusion
It can be concluded that the management accounting system and ten costing methods adopted in
IMDA Ltd can lead organization to improve the business performance and expand its business
operations for better profitability and growth in future (Morris, 2017).
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Task 3
Report
Introduction
This report incorporates information about budgetary control, uses, advantage and disadvantage
of it. It also explains the planning tools and their merits and disadvantages which are used in
management systems for better and efficient operations and to achieving the goals of company.
Additionally, it also includes the different types of budget structures which can be made by the
IMDA Ltd For proper and profitable management.
P4. Explain the advantages and disadvantages of different types of planning tool that can
be used for budgetary control for the chosen scenario.
Budget is a statement of estimated incomes and expenses. It deals with factors like volumes and
incomes, asset, expenses and costs, resources, liabilities and money streams. A budget is a
diagram of plans of business activities to attain a given target with in a fixed period of time.
Budgetary control is a structure, framed to compute the changes between the actual and the
planned outcomes to learn that the plans are taken after and actualized by the management of
Imda Ltd. It causes the management of IMDA Ltd to identify the shortage if the plans are not
taken after or are not been satisfied (Legaspi, 2014).
The different planning tools are as below:
1. Standard costing: Standard costing is used for cost control. Standard costing used for
estimation of cost for all business operations and examination of that with real outcomes.
Mainly standard costing is used by manufacturing companies to identifying and control the
major cost factors which are direct material cost, labor cost, and overhead cost.
2. Variance analysis: it is the study of discrepancy between actual results of business
activities and standard of organization It is the examination of those reasons which is
responsible for contrast among standard and real expenses (Aleem, et. al., 2016.).
3. Responsibility budgeting: responsibility budgeting is a report which is used to recognize
the implement level of troughs and objectives for what is to come. It is used by top level
management to guarantee that each division and responsibility center is in charge of his work
and aftereffect of work.
The various advantages and disadvantages are as follows:
Tool Advantages Disadvantages
Standard costing  Cost control
 Performance
 Costly for
small businesses
 Need of
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scrutiny
 Identify such factors
which are liable for
inadequacy
 Increase in work
efficiency (Vitez. 2017)
regular
restructuring.
 Crates
pressure on
employees.
 Risk of bad
estimation of
standards
Variance analysis  Provides control on
shortfalls.
 Cost reduction
 Availability of
comparative data
 Helps in budget
forecasting
 Better control on
mistakes.
 Time gap
between financial
result and corrective
action.
 Needs lot of
information and
calculations (Morris,
2017).
Responsibility
budgeting
 Availability of
Division-wise information
for comparison.
 Increase
productivity.
 Improved
managerial control.
 Hard to use
 Worthless
stress on employees
(Bragg, 2016).
M3: Analyse the use of different planning tools and their application for preparing and
forecasting budgets with special reference to the chosen scenario.
Budgetary management planning tools are very important for every organization in following
manner:
 Planning: Planning for future is very useful and important for every organization.
Planning tools for budgetary control are very useful in planning and forecasting. Correct and
summarized data which is provided by planning tools are used in effective and efficient
planning and forecasting of business activities.
 Coordination and communication: planning tools help to create two way
communication structures between management and various departments. Better flow of
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information and coordination provides higher efficiency and performance in business
activities. Better coordination between different departments creates competitive advantage
for company.
 Forecasting and estimating: forecasting of future operations is very important for every
organization. With the assistance of various planning tools, management can audit the past
revenues with actual incomes and can identify the responsible factors behind fluctuations
which will be supportive in better preparation of the budget and goals for future.Planning
tools encourage the management to conjecture the factors and can make spending plan as
needs be (Bragg, 2016).
 Investment decisions: decision of investment is very difficult and risky for every
organization. A good investment decision will make higher returns for business and a bad
decision will harm in serious manner. Management needs accurate and clear data in decision
making of investments. Planning tools help them to investigate every option with each factor
and to take choice in like manner. Management can choose best investment option after
viewing and comparing all aspects of every option (Vitez. 2017).
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P5: Compare how organisations are adapting management accounting systems to respond
to financial problems.
Management accounting systems are those management reports which are used by management
for decision-making process. (IMDA)
Management accounting tools alludes to association of the budgetary information to compare
and provide details regarding it. It causes the management to keep the records of every single
exchange. It encourages the management to discover the shortfalls in the working and to make
defensive steps required to defeat them. Management can identify the latest trends in business
and manage resources in best manner (Aleem, et. al., 2016.).
To respond financial problems management can use management accounting systems in
the following manner:
Performance examination: with the help of management accounting tool IMDA Ltd. can
examine the performance of various business operations with pre-decided standards.
Performance examination is based on KPI's which is divided into two categories like-
 Financial KPI: it includes gross profit margin, net profit margin, assets ratio, debt ratio
and cash flow.
 Non-financial KPI: it includes foot traffic, employee turnover, customer repetition,
capacity, law changes.
With the help of planning tools, management of IMDA ltd can prepare a comparative report of
actual results and pre-defined standards to ensure the efficiency in working and (Legaspi, 2014).
Benchmarks: Benchmark is purpose of computation by which something can measure.
Benchmark gives monetary and non-monetary related key operational markers to explain the
execution of an association. These key operational markers are utilized to discover reasons of
deficit, which is happening in determination of standard targets and real figures. IMDA Ltd. Can
review the level of performance. This will enable the IMDA Ltd to find out at the method
utilized by the competitive organization and same should be possible for them to expand
capability and profitability. It will help also for IMDA Ltd to check the reason behind distinction
between the expenses and incomes created crosswise over competitive organisations.
M4: Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success with special reference to your chosen scenario (D3).
Budgetary control: by using the budgetary control techniques IMDA Ltd. can identify the
factors which are liable for un-favorable variances and take corrective decision for same. It
involves the study of current weaknesses and future possible profitability and deficit. Budgetary
control creates a corrective action structure for operational problems which results as reduction
in cost. It provides a corrective framework for the current issues and furthermore for the future
chances and dangers (Legaspi, 2014).
15

Financial management and control: financial management and control are about the
responsibility of the management towards the stakeholders and owners identified with format
and structures. It indicates the duty and responsibility of money related factors, formats, and
frameworks of control. It will help the company to make the management more responsible. It
helps the management in formulation of sound inter and external control system (Vitez. 2017).
Financial management creates a sound control on various possible mistakes and prevents the
organisation forms them. Some techniques of financial management which are used for
responding to financial problems are:
 Statuary audit
 Concurrent audit
 Cash status reports
 Internal control system
 Tax audit
 Expense audit
 Annual manager’s scrutiny reports.
Decisions related investment and funds: The investment choices are exceptionally important
and critical. It is hard to ascertain the advantages and disadvantages before taking them.
Investment related decisions Affect Company for a long period and the sustainability of
company. Management can choose best option from available options which provide highest
return on investment with lowest risk (Aleem, et. al., 2016.).
Conclusion
The report contains information about budget and budgetary control. It concluded that budgetary
control is very important and essential for every business. Budgetary control is very helpful for
IMDA Ltd to correct and control the problems which are faced by company in routine and long
time. It inspires the IMDA Ltd to be more successful and furthermore in decreasing the
production and administrative costs that are looked at the routine activity. budgetary control
techniques contain some limitations also but the profit of these techniques are more
comparatively.
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Conclusion
Development of organization is affected by many factors. Some of them are internal factor which
is May controllable or some are external which are fully uncontrollable. In modern business
scenario, it is necessary for every organization to be focused on market situations to win
competitive benefit. Management accounting has helped the business to be aggressive in the
market by using the resources in best and effective manner. It helps the management to develop
the business by effective and efficient use of sources. It helps managers to make plan and to take
actions as per plans for pre-decided goals. It is concluded that the management accounting
system is very useful for every business in dealing with problems and threats. It also helps in cost
reduction and outflow management that is very important for every business to increase the
profit. If methods and techniques of management system are performed in good manner it
provides competitive advantages over the market.
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