Management Accounting: Principles, Techniques, and Applications

This comprehensive guide delves into the fundamental principles of management accounting, exploring its role in organizational decision-making, cost analysis, and performance evaluation. It examines various costing techniques, including marginal and absorption costing, and analyzes the application of planning tools like budgeting and variance analysis. The report also critically evaluates the integration of management accounting systems within organizational processes and explores how these systems can be adapted to address financial challenges and drive sustainable success.

Management Accounting
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Table of Contents
Introduction....................................................................................................................................3
Task 1..............................................................................................................................................4
P1.................................................................................................................................................4
P2.................................................................................................................................................6
M1................................................................................................................................................7
D1................................................................................................................................................8
P3.................................................................................................................................................9
M2..............................................................................................................................................12
D2..............................................................................................................................................13
P4...............................................................................................................................................14
M3..............................................................................................................................................15
P5...............................................................................................................................................17
M4..............................................................................................................................................17
D3..............................................................................................................................................19
Conclusion....................................................................................................................................20
References.....................................................................................................................................21
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Introduction
The assignment includes the concept related to management accounting and importance of
management accounting system in the organization. There are various methods of management
accounting reporting are stated along with various reports formed in an organization. The
benefits of the management accounting system along with its integration with the management
accounting reporting is also stated. There is an analysis of various costing techniques and
analysis of the results achieved. The assignment also includes different types of planning tools of
budgetary control along with other methods than budgeting is also stated. The ways through
which management accounting system leads to organizational success by solving the problems
related to finance are also included. The planning tools importance in leading the company
towards sustainable success is also stated in the assignment along with their effectiveness while
preparing the budget. The report also consists of a brief about the corporate governance along
with its usefulness to prevent the problems related to finance.
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Task 1
P1. Explain management accounting and give the essential requirements of different types
of management accounting systems.
According to Bodnar, et. al., (2012), Management accounting systems are systems which
records, analyze and interpret financial information and interpret financial information into
meaningful analysis. Management managers need to plan, organize, interpret and analyze
financial and non-financial information for relevant decision making and for setting futuristic
goals.
Management accounting subjectivity:
The major functions of management accounting systems are that it records data and interpret data
into meaningful information, the information or reporting so interpreted is highly useful for
communicating with each other managers, it records and controls account as well, it also
analyses both quantitative and qualitative information, it considers all kinds of information as
non-metric information are also highly useful for making relevant decision making (Chen, et. al.,
2012).
Various accounting systems:
Financial accounting systems: Financial accounting is the accounting branch which records and
analyzes all the financial transactions. Financial accounting systems are the integrated systems
which not only keep access to transactions and generate meaningful information.
The major purpose of financial accounting systems is that it is an accounting system and internal
control. In an organization, every specific year, a number of accounting transactions takes place
which has to recognize and reconciling financial figures, therefore, this system is mainly an
accounting system and is used for internal control purpose. It is also useful for the purpose of
auditing. Auditing requires re-confirmation and re-checking of all financial transactions which is
easily done through cost accounting system (Chen, et. al., 2012).
Cost accounting systems: Cost accounting system provides detailed description making
products costing and describing the cost incurred for production of a single unit. There are
different types of costing systems such as process costing, job costing process, product costing
and activity-based costing. Activity-based costing is a system which makes costing in
accordance with the organization processes (Chen, et. al., 2012).
Management accounting systems: These systems are critically important for organizations for
the purpose of decision making, organizational support, and profitability management and for
investment management. An organization has to go through a large number of financial
transactions involving big project investments, products development and other decisions (Drury,
2013).
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Tax accounting: there are different types of an organisational structure such as sole proprietor,
partnership organization, companies etc. the different structures requires implementation of
different taxes such as GST, international taxation, double taxation etc. The major purpose is to
evaluate taxation figures for an organization (Drury, 2013).
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P2. Explain different methods used for management accounting reporting?
Every organization prepares different accounting reporting such as trading and profit and loss
account, statement of financial position, cash flow, fund flow and cost of goods sold. The
different reporting is done to analyse financial expenditure and financial incomes (Drury, 2013).
Trading and profit and loss account: this account is prepared for measuring organization profits
by analysing the trading financial figures of sales and direct costing. The trading calculates the
gross profits by analysis direct expenses and the profit and loss account ascertains all the indirect
expenses and indirect incomes and calculates net profits (Drury, 2013).
Balance sheet: this statement presents the financial figures of assets and liabilities. This is
ascertained at a point of time which measures the value of assets like fixed assets, plant, and
machinery and also measures the value of liabilities like long-term debt, long-term liabilities etc.
(Drury, 2013).
Cash flow statement: This statement considers the inflows and outflows of cash during a
specific period. Since cash is a most important form of liquid asset and it is essential to evaluate
cash flows so as to reconcile with other accounting transactions (Parker, 2012).
Cost of goods sold: this statement describes the valuation of the cost of products by ascertaining
the direct cost incurred over the organization. The cost ascertained in this segment includes
opening inventory, direct material cost, direct labor cost, production overheads and the value of
closing inventory (Parker, 2012).
The various accounting systems are as follows:
Cost accounting system: A cost accounting system is one system which makes an analysis of
products costing. There are different types of costing system such as process costing, activity
based costing etc. For instance: segregation of product activities into series aids in making
costing.
Inventory management system: Inventory management system is one which keeps proper
planning and controlling of inventory and also analyse the costing of such products. There are a
number of inventory terms which have to be EOQ, inventory order level, inventory carrying cost
etc. For instance: the carrying cost per unit of a product A is an example of inventory
management system (Sánchez-Rodríguez, et. al., 2012).
Job costing system: This system makes costing for products in accordance with every batch.
The costing is done for every batch, though every batch might have identical products but the
costing values might differ and lead to different profitability and revenues and hence job costing
is useful for evaluating products value.
Price optimizing system: this system is useful for measuring pricing of products to be sold. All
the products which have to be sold require having a pricing. The pricing system requires a lot of
information and makes products pricing (Sánchez-Rodríguez, et. al., 2012).
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M1. Evaluate the benefits of management accounting systems and their application within
an organisational context.
In an organizational context, MIS and DSS are two vital systems which require being assessing
and installing. Both the systems have their own pros and cons to be evaluated.
MIS i.e. management information system is an integrated software application which combines
the organizational processes. A manager has to input data into the MIS system and also need to
put into varied assumptions and futuristic goals for making analysing and interpreting result
(Teatime, 2013).
The major benefits of installing MIS are as follows:
• It is a major source for centralizing database and providing easy access to all. This is a
major source for easing facilities and more prompt communication among managers and
employees (Teittinen, 2013).
• It is also useful for other management accounting systems. Since it centralizes data at one
place, another department can easily use the data for making decisions.
• The most useful factor about it is that it helps in decision making. Organisations need to
formulate decisions regarding organization processes, inventory management,
manufacturing processes, project investment, capital projects etc. (Teittinen, 2013).
• DSS i.e. decision-making system is another application which mainly considered as
intelligence software as it is used by the higher authority for making relevant decisions
and comparing a different set of problems.
• It helps in solving complex managerial issues and problems which involves complex
decisions issues.
• DSS is a kind of artificial intelligence which is used for formulating decisions in complex
situations (Theriou, and Aggelidis, 2014).
• Though it is quite complex, proper installation of data must be done and thus, the proper
interpretation is made.
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D1. Critically evaluate how management accounting systems and management accounting
reporting is integrated within organisational processes.
DSS is a management system which contains integrated interface and aids highest authority in
decision making. This system is implemented at varying levels such as planning, management,
and operations. ESS system is highly used by executive managers for ascertaining solutions for
organizational issues faced by executives. It is mainly used for the operational level (Theriou,
and Aggelidis, 2014).
Thus, there is a high level of difference between both the systems and thus, organizations take up
benefits of both the systems. DSS helps in quite accurate and precise decision making and relax
the work of highest authority while ESS is a system which aids in operational data and making
organizational decisions.
There are different reporting’s which are generated through these systems which present
financial information such as incomes, expenses, valuation of assets and liabilities, gross profits,
cash flows, values of reserves etc. (Theriou, and Aggelidis, 2014).
This information must be accurate and relevant and must also adhere to the management
accounting characteristics such as relevancy, materiality, understand ability, timelines for
becoming useful information. The presentation also plays a key role in presenting financial
figures to all stakeholders such as shareholders, suppliers, creditors etc.
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P3. Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costing.
Cost refers to the expenditure made for manufacturing products and costs are classified into a
number of factors, direct cost, and indirect cost, product cost, process cost and flexible costing
etc.
Direct cost and indirect cost: Direct costs are the costs which are directly incurred over the
manufacturing products and indirect costs are the overall costs which do not have any direct
attribution to products. Direct costs are direct material, direct labor and indirect costs are
administrative cost, selling costing etc. (Warren, et. al., 2015).
Fixed and variable cost: Fixed costs are the costs which have to be incurred irrespective of
production capacity while variable costs are incurred in accordance with the production capacity.
Period cost: A period costs which are incurred and cannot be capitalized. The various examples
are pre-paid expenses, inventory expenses and fixed assets (Warren, et. al., 2015).
Product cost: Product costs are costs which directly attributes to the production of products.
Various product costs are direct labor cost, direct material costs, and factory overheads. Since
expenditures of these costs are essential for the production of products and hence, product costs
are maintained.
Marginal costing:
In this technique, per unit cost of products are analysed through considering variable cost and not
fixed costs and the valuation of the closing stock is valued at variable cost.
Absorption costing:
In this technique, products per unit costs are done by considering both variable and fixed cost. It
is based on absorbed cost concept (Warren, et. al., 2015).
Normal and standard costing: In normal costing, actual costs of products are ascertained and
these define the actual costs incurred for products. In standard costing, certain standards are set
for products which have to be met.
Activity-based costing: This is a costing technique in which activities involved in product
manufacturing are lined up and costing is done in accordance with the activities. The major
advantages of the technique are that it aids in improvising activities processing and improvising
distribution, selling and other activities. The disadvantage of the systems is data
misinterpretation, requires excessive time and efforts which further leads to delay (Warren, et.
al., 2015).
Marginal costing:
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Absorption costing:
Reconciliation statement:
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Analysis: The reconciliation statement shows the difference in the marginal and absorption
costing. The difference between the profits is due to valuation of inventory and ascertainment of
profits in both the segments.
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M2. Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents.
The management accounting techniques which were applied to the practical aspect were
marginal and absorption costing. Marginal costing is a technique which considers only variable
costing while formulating products costs and there is also a part of the fixed cost in products and
the net profits are ascertained. Absorption costing is a technique in which products are costing
including variable and fixed to the extent they are absorbed. Thus, the difference among both the
techniques is mainly due to the valuation of stock and profits valuation is also different.
Organisations use different techniques for different interpretations (Warren, et. al., 2015).
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D2. Produce financial reports that accurately apply and interpret data for complex
business activities.
The financial reports (the income statement) as presented above shows the difference in marginal
and absorption costing. The difference lies mainly due to the ascertainment of costing
techniques. The techniques aid in simplifying costing process and measuring stock valuation,
profit measuring (Warren, et. al., 2015).
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P4. Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.
There are different types of the budget that can be prepared by the organization depending upon
the requirement. Some of the examples of the budgets are Zero-based, Incremental, Cash, capital
and operating. Zero-based budgeting is a method of budgeting in which everything is started as
fresh after a period of time. The factors are analyzed before there is a change in the budget of the
company and also find an alternative to reduce the cost of the company is possible. The
Incremental budgets are prepared on the basis of the results that are achieved in the previous year
and changes are made accordingly. The advantage of incremental budgeting is easy and can be
understood by all the levels of the organization but there are some disadvantages too such as it
assumes that the activities and methods will remain constant as earlier. The cash budgets are
prepared for the inflow and outflow of the cash. It is useful in determining the future cash
possibility and also facilitates the fund management. There is lack of flexibility and also delays
the decision-making process (McIntosh, 2017). The operational budget includes the budget for
the daily expenses incurred by the organization whereas the capital budget includes the budget
related to the investments. The operational budget is useful in determining the cost and reduces it
at regular intervals whereas the capital budget is helpful in choosing the best investment project
available. The disadvantage is that the decisions are irreversible and changes in the factors can
affect the decisions profitability (Borad, 2018).
The implication of the budget can be favorable as well as unfavorable. The budget is an
important tool for the planning process and helps in achieving the goals and objectives of the
company. The budget is prepared can be prepared on the top to down for the whole of the
organization depending on the various factors surrounding. The budget is helpful in determining
the performance and motivating them (McQuerrey, 2018). There are also some problems with
the preparation of the budgets which is that it creates a pressure to the employees of the
organization which also led to demotivation or frustration among the employees of the company.
The budget can also be understated by the managers which are also known as budgetary slack
leads to the differentiation among the company goals and objectives.
There are various other methods that can be considered instead of the budgeting such as variance
analysis, inventory management, benchmarking. The variance analysis measures the
performance of the standards set and helps to overcome them for an effective result. The
Inventory management is useful in reducing the cost of the company and also better management
of funds. The benchmarking is useful in strengthening the process by analyzing the methods and
process used by the topmost industries (Ordelman, 2016).
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M3. Analyse the use of different planning tools and their application for preparing and
forecasting budgets
The planning tools are helpful in the development of the budgets and forecasting by analyzing
the factors that are surrounding the organization. To prepare an effective and efficient budget it is
important that the factors that can affect the production or profitability of the product are
analyzed. There are various budgets prepared by the organization depending on the need and
nature of the business. The planning tools help in preparation of the production budget by
analyzing the market trend and analysis which can hamper the demand for the product in a
favorable or unfavorable way. The factors such as the economy of the country can affect the
sales of the product or services provided by the organization which can be analyzed and used to
analyze the cash flow budget of the company.
Case 2
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Particulars Amount (₤) Amount (₤)
%
Increase/d
ecrease
Amount (₤)
%
Increase/de
crease
Amount (₤)
January February March April
Opening cash balance 15000 -8500 36500 106900
Cash receipts expected
Cash revenues 20000 35000 75% 40000 14% 45714
Collection of accounts 45000 55000 22% 70000 27% 89091
Other incomes 5000 6500 30% 5000 -23% 3846
Total cash receipts (A) 85000 88000 4% 151500 72% 245551
Expected cash payments
Raw material 50000 11000 -78% 5000 -55% 2273
payroll 10400 10400 0% 10400 0% 10400
Other direct expenditures 2000 2000 0% 3000 50% 4500
Advertisisng 10000 5000 -50% 3000 -40% 1800
Selling expenses 6000 8000 33% 9000 13% 10125
Admin expenses 4500 4500 0% 4500 0% 4500
Plant and machiunery expenses 10000 10000 0% 9000 -10% 8100
Other payments 600 600 0% 700 17% 817
Total cash expenses (B) 93500 51500 -45% 44600 -13% 42514
Closing cash balance -8500 36500 106900 203037
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P5. Compare how organizations are adapting management accounting systems to respond
to financial problems.
The management accounting systems are very much important for resolving the financial
problems related to the organization. There are various systems that can be used for the tackle of
the problems which are as follows:-
Benchmarks – The benchmarking is the technique in which the results are being analyzed by the
management with the companies who are the leaders in that industry. There is an analysis of the
difference between the figures of the organization and that of the rival company. The
benchmarking is useful for the better measurement of the performance and determining the
reason for lagging behind (Zhu, 2014). The benchmarking is useful in solving the financial
problem by increasing the performance and making the process that is being used effective and
efficient.
Key performance Indicator – The key performance indicators are of two categories financial as
well as non-financial. The financial indicator measure on the basis of quantitative analysis
whereas the non-financial key indicators measure the performance on the qualitative aspect such
as the customer service after the sale of product or services provided etc. The key performance
indicator measures the company as a whole and overall performance (Muriana, et. al., 2016). It is
useful in solving the financial problems related to the trust among the customers of the company
and fulfillment of the same to retain the customers and create new customers. These are useful in
making the performance of the company up to the mark and providing a competitive edge over
the competitors.
Budgetary Targets – The budgetary targets are very much useful for the organization. It is
important to have a comparison of the performance of the results achieved. The budgetary targets
are an important tool for the benefit of the company. The company is able to analyze the
differentiation between the actual results and budgeted results of the company. The budgetary
targets are useful in determining the problems behind the non-achievement of targets set by the
company (Lajevardi, 2017). It is useful to safeguard the organization from any unfavorable
circumstances and makes better the efficiency and productivity of the company.
M4. Analyse how, in responding to financial problems, management accounting can lead
organizations to sustainable success.
The financial governance can be defined as the setting up of the accountability and responsibility
of the managers. The financial governance helps in providing the roadmap about the use of the
authority and the priority to be set by the organization. The financial governance is also about the
implementation of system and structure for an effective management and accountability of the
person towards the stakeholders of the company (Zou, et. al., 2015). The financial governance
can be used in pre-empt or solving the problem in the following way:-
Audit Committee – The Company can set up Audit committee for the analysis of the financial
statement and work. The Audit committee can found out any flaw in the process and work to
effectively measure the performance.
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Internal Audit – The internal audit is helpful in keeping a check system of the internal process.
It is effective in reconciling the data and transactions recorded in the internal system.
External Audit – The Company can use the external audit for the analysis of the specific laws to
be compiled by the organization for better management.
Annual report – The annual report is the future growth and objective along with the
achievement that the company has received during the year.
Case 3
Particulars Budgeted Units Budgeted Price Amount (₤) Actual units Actual price Amount (₤)
Product A 90 12 1080 100 11 1100
Product B 110 15 1650 125 13 1625
Total sales 200 2730 225 2725
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D3. Critically evaluate how planning tools for accounting respond appropriately to solving
financial problems to lead organizations to sustainable success.
The planning tools for accounting are useful in attaining the sustainable success by solving the
financial problems. The system such as the effective and timely reporting, the disclosure of the
financial position of the company helps in solving the financial problem of the company. The
accounting system such as the timely reporting helps in analyzing the data in an effective and
efficient way as there are timely recording and reporting. It facilitates the strategic planning of
the company and achievement of goals and objectives.
The disclosure of financial position is important not only for the company but for the
stakeholders also. The financial position of the company helps to analyze the profitability of the
company. It helps them to take preventive steps to improve and position and focus on the area
which needs improvement. The company is able to achieve higher growth and success with an
increase in the productivity and efficiency.
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Conclusion
It can be concluded with the help of the report that management accounting is used for the
organization in saving the cost incurred and efficient utilization of resources. There are various
methods for reporting which are useful in the determination of cost and management of the same.
The management accounting system leads to recording and analysis of the data in an effective
way. The absorption costing and marginal costing is useful for the analysis of cost involved and
effective cost analysis. It can be stated that the management accounting system and reporting are
integrated by recording and presentation of the reports. The budgetary controls are important for
the preparation of the budgets. It can also be concluded that the planning tools help in the
formulation of budgets as well as in helping them achieve an organizational goal and sustainable
success. It can be stated that the corporate governance is useful in setting up of responsibility for
the decision making related to finance helping in better decision making.
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