Management Accounting Principles and Techniques for Effective Decision Making

This report discusses the principles and techniques of management accounting for effective decision making. It covers the role of management accounting, its integration within the organization, and comparison between management accounting tools. The report also includes solved assignments, essays, and dissertations on management accounting. The subject is Unit 5-Management Accounting and is relevant for students pursuing courses in accounting and finance. The report is applicable for students from various colleges and universities.

Unit 5-Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
PART 1............................................................................................................................................3
1. Management Accounting Principles...................................................................................3
2. Role of management accounting and its systems...........................................................4
3. Use of techniques and methods in management accounting by presenting calculations
for an income statement using variable costings...............................................................5
4. Integration of management accounting within the organisation.................................8
5. The benefits of function to the organisation.............................................................9
6. Conclusions.......................................................................................................................9
PART 2..........................................................................................................................................10
Comparison between management accounting tools...........................................................10
Application of management accounting for solving financial problems..............................13
Recommendations for sustainable business.........................................................................13
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting may be seen as a practical tool aimed at solving the day to day
financial management problems faced by decision makers in the private and public sectors. In
today's competitive world, managers from different managerial backgrounds need an
understanding of the tools of management accounting when making financial decisions, they
must also be aware of the qualitative issues affecting such decisions. This report has been
divided in two parts. The first one is “management accounting principles” and the second one is
“effective planning tools for managing accounts”. In the first part the principles and role of
management accounting and its systems are briefly explained using the techniques of absorption
and marginal costing. Further, this part is summed up by describing its integration and benefits in
the business. While in the second part, multiple management tools and techniques are used while
providing the comparison and contrast between them. Moreover, the financial problems faced by
the organization are discussed thoroughly (Alawattage and Wickramasinghe, 2021).
PART 1
1.Management Accounting Principles
Management accounting is accounting (i.e. producing useful information) for
management. In this sense, 'accounting' includes the production of all information useful in
running the organisation. Such information may be financial or non-financial, actual or
estimated, based in the past or the future, related to profits/losses, costs/incomes, volumes,
trends, etc. Similarly, 'management' may include the activities of individuals in a number of
positions, for example senior managers, mid-level and lower level managers, executive directors
with management responsibilities. Management accounting is orientated towards the future. It is
primarily concerned with the provision of information to managers to help them plan, evaluate
and control activities- Proctor. It encompasses techniques and processes that are intended to
provide financial and non-financial information to people within an organisation to make better
decisions and thereby achieve organisational control and enhance organisational effectiveness-
Wilson and Wai.
Principles of Management Accounting

The following are the generally accepted principles of management accounting:
 Designing and Compiling: Accounting information, records, reports and other evidence
of past, present or future results should be compiled and designed to meet the
requirements of the business or the specific problem, if any. The management accounting
system is designed in such a manner which presents the relevant data for solving a
particular problem.
 Management by Exception: It is followed when presenting information to management. It
means that standard costing techniques and budgetary control system are followed in the
management accounting system. The actual performance is compared with pre-
determined one and the deviations are calculated. The unfavourable deviations are
informed precisely to management.
 Control at Source Accounting: This principle says “Costs are controlled at the points at
which they are incurred”. The details of material issues and utilization and usage of
services such as machine, power, repairs and maintenance, etc. are prepared in the form
of quantitative and qualitative information. Control can be exercised over materials,
employees and service providing devices in this way.
 Absorption of Overhead Costs: The overhead costs are the combination of indirect
materials, indirect labour and indirect expenses. They are absorbed on any predetermined
basis. The selected method for absorption should bring about the desired results in the
most equitable manner.
 Utilisation of Resources: Available resources should be used effectively. Some resources
are available in plenty and some are available in scarcity throughout the year. Hence the
management system should ensure the proper utilisation of available resources.
2. Role of management accounting and its systems
Management accounting and management accountants may be in a position to have a
significant influence upon the actions and strategies of organisations. With this potential
influence comes the burden of ensuring that management accounting information is generated
and communicated in a responsible fashion. The management accountant's role is a responsible
one which can have direct effects on people both within and outside of the organisation. The
management accountant, as the provider of performance monitoring information, acts as an

important and influential link in the chain between management and employees, and between
shareholders and management. (Dalla Via and Van Rinsum, 2019)
The role of management accounting includes:
 Establishing, coordinating and administering plans to facilitate the forecasting of sales,
expense budgets and cost standards that will permit profit planning, capital budgeting and
financing.
 Formulating accounting policy and procedures. Comparisons made between actual and
expected activities should help the management in proper fixation of responsibility and
also in the evaluation of the various functional and divisional heads.
 Responsibility for the protection of the business assets to the extent possible by external
controls, internal auditing and insurance coverage.
 Responsibility for tax policies and procedures, supervising and coordinating the reports
required by various authorities.
 Continuously being aware of economic and social forces as well as the effect of
governmental policies and actions on business activities.
An effective management accounting system reaches into all departments of a business:
marketing, human resources, finance, operations and sales. To provide critical information to be
used in operational business decision making, internal management accounting systems are used.
These systems can be used by a manufacturing company to help in the costing and managing of
their process. A hospital might use these systems to assist them in insurance billing and other in-
house requirements. These systems vary within the industry they are used in and allow for
functionalities and report specific to that industry.
3. Use of techniques and methods in management accounting by presenting calculations for
an income statement using variable costings
The expenditure required to create and sell products and services or to acquire the assets
is called cost. When sold or consume, it is charged to expense. For analysis purposes, cost may
be designated as a variable cost which varies with the level of activity. A cost can instead be said
as a fixed cost which does not vary with the changes in the level of activity.

Marginal Costing: It refers to the ascertainment of marginal costs by differentiating between
fixed costs and variable costs and the effect on profit of the changes in volume or type of output.
In this case, only the variable costs are charged to products or operations while fixed costs are
charged to profit and loss account of the period in which they arise.
Absorption Costing: The process of charging all costs both variable and fixed to operation,
process or product is termed as absorption costing. Income Statement of Accenture according to
the absorption costing strategy is as follows:

The reports formulated above are legitimate and true to the management's best knowledge, due to
the fact that various organisational decisions could be dependent on them. The above data
included in the reports, are examined by authorised personnels in Accenture. The concept of
variable costing concentrates on exclusion of fixed manufacturing overheads to calculate profit
earned. The fixed cost is usually included in cost of production, and is used in Absorption
costing, in which fixed overheads are allocated to products. Even though variable costing can
provide relevant information, however it cannot be used for the purpose of financial reporting as
per the accounting frameworks such as IFRS or GAAP. Following are the merits of variable
costing and how it helps management in accounting:
 Planning and controlling – The variable costing income statements are better for internal
usage for short term planning and controlling tasks. To carry out the functions, managers
must understand and project how various costs of different nature, will change in
response to change in level of activities.
 Product pricing decisions – The management addresses the orders related to product or
services, when variable costing suggests so, if abnormal and contingent conditions exist.
Variable costing defines the minimum sales price under aforesaid conditions and

provides important information in context to the contribution margin and most profitable
policies of pricing.
 No effect of inventory changes – In variable costing, the profit is defined as a function of
sales only, hence will remain unaffected by the changes in inventory, whether closing or
opening.
 Segmental reporting – The segmented reports which are drafted on the basis of variable
costing is more preferable as it results in accurate analysation of profitability related to
plants, products, activities, territories and other segments. It elementally concentrates on
the contribution that individual segments make in the course of business.
4. Integration of management accounting within the organisation
Today's managers cannot ignore the role of management accountants since competition is
increasingly causing the demand for quality products and services. According to a study, for all
industries, the managers prioritized the following factors: “customer's satisfaction, quality of
product or services, running and controlling of management operation, and company
profitability”. To achieve these, managers felt that they needed a strong form of management
system and management accounting was considered as the main tool towards guiding them to the
realisation of the stated goals. Through many studies it was clear that management accounting
was more valuable and relevant to manufacturing industries as they constantly have to monitor
their production costs, manage their pricing, budget their capital for present maximisation and
future sustainability, and effective decision making. Since organisation can be different based on
their operations and activities, management accountants should be engaged through a structured
approach that identifies the critical operational aspects of each unit or department. There are
numerous management accounting processes like Activity Based Costing (ABC),
Grenzplankosterechnung (GPK), lean accounting, resource consumption accounting (RCA),
among others. ABC, GPK and RCA are the most popular as they are applicable in numerous
organisations. One of the most guaranteed approaches of ensuring the management accounting
information on cost accounting is highly effective is combining different management
accounting methods in the analysis of processes and development of guiding data. In this regard,
the possibility of integrating all these processes has to continuously be used to ensure the culture
of management accounting is also accurate and detailed. In the long term the organisations'
performance improves, leads to competitive advantage and also the management has a support

system that is effective to its needs. One of the strongest technique applied when seeking to
create a culture in an organisation is rewarding the culture. This causes the habit or approach to
performance is sustained or even improved further. The successful application of management
accounting can be noted in various ways including: the maximisation of organisational resources,
continued control of costs amid the growing organisational profits and better staff and customer
satisfaction (Hui, 2019).
5. The benefits of function to the organisation
 Inventory Management System – Applying a system which will handle the stock and its
movement, will help Accenture deal with problems like inventory shortage or increased
wastage. Before application of any inventory management system, the company must
critically examine the statements related to stock and other similar details.
 Cost bookkeeping system – This benefits the accounts and finance department of
Accenture, by evaluating variable and fixed expenses incurred in the business cycle. It is
usually used for keeping track of costs, calculation of gross edges and differences in item
values, through proper tools and techniques.
6. Conclusions
Management Accounting is a decision making approach used to increase an
organisation's value by allowing its managers to make decisions based on evaluation of costs and
other performance issues. It is holistic in nature and mainly performed for internal use. The
impacts of management accounting make it a critical tool in organisation's survival in the short
and long term and therefore, this report supports its application in the organisation. Such impacts
include the ability to guide the decisions made through the information provided, the ability to
ensure maximisation of both human and physical organisational resources, the ability to ensure
strong organisational operations through the utilization of technologies and the ability to ensure
satisfaction through the products and services provided by the organisation. These benefits can
be summarised as better profits, increased satisfaction and enhanced organisational performance.

PART 2
Comparison between management accounting tools
Financial Planning and Analysis:
The organizational health or position is assessed by four activities, which are planning,
budgeting, performance reporting and management. These activities together define the process
of financial analysis, leading to effective application of financial resources and linking corporate
strategies to vision and mission of the organization. (Lueg, 2018)
Advantages Disadvantages
Real time analysis of historical and current
expenses, which helps generate forecasts and
reports and seize opportunities for growth and
investments purposes.
A skilled analyst is capable of performing
financial analysis successfully, in comparison
to others. For appointing such a person or a
team, will require a significant amount of
investments.
Better management of debt is also the crucial
advantage of analysis of financial statements,
furthermore by accurately analysing the ratios
related to assets and liabilities will improve
management of debts.
Only the monetary data of an organization is
included in financial analysis, all of the non-
monetary transactions, are overlooked. This
leads to unwanted losses or outflow of benefits
.
By using financial statements, paying close to
the due date the organization can preserve
liquidity or even request deferred payments if
the relationship between the entity and vendor
are well built, through effectively managed
transactions.
The financial statements are always based on
principles and concepts of accounting. For
instance, the stock of raw material may be
valued at cost and finished goods stock may be
valued at cost or market price whichever is
lower. Hence creating mismatched or
misleading information.
By analysing the financial statements and other
necessary documents, the organisation can
easily mitigate risks related to different types
of activities. It also helps correct delays,
All of the documents used in the financial
analysis process are based on past data hence,
such cannot provide absolute assurance about
the fairness of the statements not it can provide

inefficiencies and iterative improvements will
refine the business process.
basis for forecasting or estimating future
values.
For instance, Accenture applies multiple ratios
and trend analysis to effectively manage its
business without wasting resources and at the
same time, maintaining productivity.
The financial analysis of a large firm such as
Accenture requires well qualified team and up-
to-date software, which are expensive in most
cases.
Cost Accounting:
The cost accounting is defined as the process of reporting and analysis of the structure
implemented in an organization. Through this process, the costs are assigned to cost objects that
usually include products, services etc. of the company.
Advantages Disadvantages
Cost accounting provides, assistance to
management by helping them comprehend the
pattern of costs incurred in business and how
to successfully control it leading to reduction
in costs.
The costs of items keep on changing as per the
surrounding market conditions, almost every
year. Hence absolute assurance cannot be
given about costs of company.
The accounting experts apply and create
certain accounts to get through a situation,
which can be compared and cost estimates can
be provided for forecasting and managing.
To calculate the company's cost, proper books
should be maintained. Without books of
accounts, such as sales book, purchase book or
journal, no analyst could estimate the actual
cost incurred.
It also helps government, acquire relevant
information for assessing the tax implications
and levy as per the profit earned by the
company, as all of the costs in relation to
business items are identified.
Cost accounting is a complex and somewhat
rigid procedure. It takes relevant skills, training
and experience to thoroughly understand the
process and provide fair estimates.
When it comes to the Trade Union, they could
use statements prepared on the basis of cost
The cost accounting system, requires
management to absorb costs at pre-determined

accounting to effectively calculate Bonus and
remuneration can be fixed reasonably.
rates, which many-a-times lead to over or
under absorption of overheads, be it fixed or
variable.
The most important matter for which cost
accounting is used in organizations such as
Accenture, is for setting up costs and
comparing them with the standard set.
Due to cost accounting being a process which
uses past data, Accenture's management cannot
use it to estimate asset price on their present
values.
Budgetary Control:
Budgetary control is defined as a control system used for comparing actual results with the
estimated ones. For initiating actions, to bridge the gap between the two or to reduce deviations.
It includes preparation of budget such as fixed, flexible, cash or purchase budget.
Advantages Disadvantages
The preparation of budget implies that the
organization must follow a definite plan to be
in line with the budget prepared, otherwise
there will be mismatched workings in the
company.
As the budgets are prepared for future, they
rely on stable conditions in the market place.
However, it is obvious that future will always
be uncertain and contingencies may arise,
hence budgets fail in this case.
Budgets are constructed, keeping in mind the
prospect of communication in between
employees. Every department is bound to
prepare budget after consulting the
departmental staff and all other levels
The targets are usually given to every kind of
person in an organisation, indirectly limiting
the efficient employees, to achieve targets and
perform beyond and better.
Budgets are said to make management process
by exception, possible. The comparison made
between the actual and current budget shows
weak points in an entity.
There may be unwanted conflicts between
multiple departments due to rigid and
individual budgets, leading to low productivity
and errors.
As various different departments are presumed
to make separate budgets, it indirectly
The budgets are prepared with the assumption
that top management or those charged with

promotes decentralisation or delegation of
authority. The subordinates and executives
may exercise initiatives within limits.
governance will be enthusiastic for the success
of budgets proposed. However, if no support
from management is received, then the system
might collapse.
For example Accenture being a consulting
firm, follows the method of zero based
budgeting, where the budgets are prepared
from scratch or completely new ones are made.
A large firm like Accenture will have multiple
departments for consumer satisfaction,
preparing budgets for all of them individually
requires ample amount of time and
investments.
Application of management accounting for solving financial problems
In any company financial problems are always present, no matter their size, profit
orientation and infrastructure. To reduce the possibility of significant loss to the organization,
many types of financial planning and analysis techniques are used, some are discussed above.
The most common problem organisations face is ineffective fund management or resource
utilization, such problems require financial analysis and management (Tan, 2019). To better
understand the situation and its impact as well as solution, following case studies are assessed:
 During COVID-19, Accenture concentrated on work-from-home policy, which certainly
constrained its high-touch consulting model, directly pressuring it to provide advisory-
centric sales. However, by opting the right techniques of management accounting, it
supported clients that haven't opted for work-from-home services and integrated digital
workplace solutions through technology platforms.
 Deloitte, a professional services company, suffered from cyber-attack in 2017, where the
hackers got access to crucial information related to its clients and staff as well. The
management coped up with this catastrophic situation by analysing the internal workings
of the multiple systems used in the company, altogether with improving its management
techniques to reduce malpractices.
Recommendations for sustainable business
Accenture uses multiple management accounting tools to nullify errors and increase
profitability. They may implement all of such techniques, through use of extensive technologies

and skilled personnel’s. However, in the climate crises era, the use of different machinery and
software, will explicitly fuel the conditions (Sari, and Sanusi, 2020). For reducing the carbon
emissions, certain strategies can be executed such as:
 Net Zero transactions, where sustainability can be opted from buildings to transport as
well as energy systems to cities. It simply requires any type of organisation to balance out
the greenhouse gases it emits with the amount it removes through various environment
friendly practices, the most effective being management of resources, without wastage or
losses, which could be due to unskilled labour.
 Sustainable technology, tailored for different needs and wants of the company can help
by way of smart building systems, digital twins along with robotics can shrink footprints
of carbon and make business workings more efficient. Moreover, utilities can be
managed sustainably through cloud computing across the entire grid or networks.
 Conscious customer experience and brand, consumers may increasingly believe in
sustainable business, but as a matter of fact, they will not implement such behaviour in
their day to day lives. Therefore, by providing them with consciously made product and
services, the company can significantly impact the behaviour and choices of the
customers.
 Value chain management, controlling only the internal proceedings of the company is no
longer, the only task to look upon, for sustainability. The management should concentrate
on the whole value chain process, that is, making sure that all the product designs,
machinery, warehouses, contractors, suppliers and transportation providers are adhering
to the highest environmental and governance practices, globally.
CONCLUSION
In this report, we have seen that the management accounting is essentially the production
of information for managers at all levels. It is forward looking and relies upon estimation. The
role of management accounting and the definition of its scope has evolved and continues to
evolve as organisations and society progress. It has argued that management accounting
information must be relevant to be useful and so must take account of organisational and
behavioural settings. It may have undesirable effects if used without careful consideration.

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