Management Accounting: Principles, Techniques, and Applications

This comprehensive report delves into the fundamental principles of management accounting, exploring its role in decision-making, cost control, and performance evaluation. It examines various management accounting systems, including absorption costing, marginal costing, and budgetary control, and analyzes their application in real-world scenarios. The report also investigates the integration of management accounting systems and reporting within organizational processes, highlighting their significance in responding to financial challenges and achieving sustainable success. Through practical examples and case studies, this report provides a thorough understanding of management accounting's vital role in modern business operations.

Unit -5 Management Accounting

Table of Contents
Introduction....................................................................................................................................4
Task 1:.............................................................................................................................................5
A. Explain the meaning of management accounting and give essential requirements
management accounting systems in the business........................................................................5
B. Explain the methods of the management reports as well as justify their importance in
the organization context................................................................................................................7
C. Explain the significance of the management accounting systems in the organization as
well as explain the importance of the management accounting and explain why it is
presented in an understandable manner.....................................................................................9
Task 2............................................................................................................................................13
A. 1) Explain absorption costing and marginal costing.....................................................13
2) Prepare an Income Statement based on the calculations of costs using both a) absorption
costing method and b) marginal costing method......................................................................13
B.....................................................................................................................................................14
Task 3............................................................................................................................................17
Introduction..................................................................................................................................17
A. Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................17
B. Show the application of the planning tools for preparing, forecasting and analyzing
budgets..........................................................................................................................................19

C. Compare how your organization is different in adapting management accounting
systems to respond to financial problems..................................................................................20
D. Analyse how your management accounting techniques could respond to financial
problems and lead the organization to sustainable success.....................................................20
E. Evaluate how planning tools could be used to solve financial problems and lead the
organization to sustainable success............................................................................................20
Conclusion....................................................................................................................................21
Conclusions...................................................................................................................................22
References.....................................................................................................................................23

Introduction
The give report has been prepared with the aim of providing a detailed knowledge as well as
scope and ambit of management accounting. This will help the every business organization to
perform better in the business operations so that it can achieve competitive advantage. Through
the application of management accounting, strategic competitive advantage can be achieved.
Also, for the ease of understanding of the concept of management accounting, a real instance of
the small and medium enterprise of UK namely, ThirdWay Group has been taken. This will
facilitate to understand the concept in a better way. Each part has its own introduction and
conclusion so that the reader of the report can get an idea regarding what is going to be covered
in the report, as well as what have been discussed throughout the report.

Task 1:
A. Explain the meaning of management accounting and give essential requirements
management accounting systems in the business.
The management accounting is defined as a process of making the financial and final reports of
the company. It helps the company to maintain the accurate financial and statistical information
of the company. It helps the managers in decision making process (Holt, 2014).
There is a difference in management and financial accounting where the former focus on helping
the insiders the latter used to serve the outsiders with the financial report of the company.
Particulars Management accounting Financial accounting
It is a process of making the
financial reports that helps the
managers in decision making.
It is process making the
financial reports which help
the public in large.
Focus It helps the insiders of the
company.
It helps the outsiders of the
company (Hemmer and Labro,
2016).
Range of accounting It deals in both management
and financial accounting
It only deals in financial
accounting.
Approach It has a long approach in
serving organization.
It used to serve the outsiders
of the company.

Different types of management accounting systems.
 Cost accounting Systems: By this method the company Thirdway Group can assess the cost of
the products and the services. The factors of profitability are analyzed by this method.
Different cost in costing system is;
Normal costing: all the units of the business like direct material labor and overheads are valued
at the actual cost. So, the base they used to value is the actual cost (Kerzner and Kerzner, 2017).
Actual cost; the actual cost of the company is measured in forms of actual material, actual labor.
This method also records the product cost.
Standard costing; it is a method of substituting the expected cost with the actual cost. The
difference of the expected and actual cost can be ascertained through this (F.O., 2015).
Job costing systems: this method helps to establish a manufacturing cost to each product and
item of the business, thus assigning each product a manufacturing cost, this may help the
company in knowing manufacturing cost of each product. Also this system helps in allocating
the manufacturing cost of each product (Holt, 2014).
Inventory management system; this system helps to maintain the inventory level at each
interval of the construction business.
Types of inventory management;
Types Explanation
FIFO; first in first out the company used to sale its
first purchase items
LIFO last in first out, the company focuses on
clearing the last purchase item at first

Perpetual Inventory This method recorded the sale and purchase of
the inventory (Kerzner and Kerzner, 2017).
Periodic Inventory It updates the inventory at the periodical basis.
This helps the company in long run.
Price optimizing systems; this method helps to ascertain a price in which the customer response
is good. So, it includes the best price for the customers and organization in large.
Essential requirements of management accounting systems;
It helps the company in maintain accurate financial and statistical information. Provides decision
making to the managers, upkeeps all the information of the company, helps to update all the
financial and statistical information of the company.
B. Explain the methods of the management reports as well as justify their importance in
the organization context.
The management reports consist of preparation of final accounts which includes the financial
statements and profit and loss account (Hemmer and Labro, 2016).
 Cost reports; these reports are used by the Thirdway company to allocate the cost to each
products and the items of the business. It will help the company in knowing the cost of each
product ( Harrison and Lock, 2017)
 Financial reports; these are the reports which are prepared by the company to know its final
accounts information like balance sheet, profit and loss account. These final accounts are
ascertained to reveal the true position of the company which is required by the outsiders of the
company (Kerzner and Kerzner, 2017).

 Budgeting reports; these reports are prepared to know the different budget of the company such
as cash budget, purchase and sales budget. The budget report is prepared for a particular period.
These reports guide the managers and the organization in providing a business plan.
 Performance reports; these are the reports through which the performance of the company can
be measured. The performance of the company is measured by comparing the actual and the
estimated standards set by the company.
 Inventory management report; this report is prepared to record the entire inventory at each
level; it helps to maintain the level of inventory. It updates and upkeep the level of inventory.
They acquire the FIFO and LIFO methods to solve the problem of maintain the inventory.
Importance of these reports in the management;
These reports are really very important from the organization point of view, it ensures the
organization with the right information, helps in the decision making. It ensures to provide the
organization to have accurate and relevant information available with them. It reduces the
ambiguity in any field of the organization. It saves the time, and ensures all the information
delivers to their client in a transparent manner.

C. Explain the significance of the management accounting systems in the organization as
well as explain the importance of the management accounting and explain why it is
presented in an understandable manner.
There are various kinds of management accounting systems that are explained above. The
benefits which are discussed below:
 Systematic maintaining of the records; it helps to maintain a records of the company by timely
knowing the cost of each product and item (Hemmer and Labro, 2016).
 Accurate interpretation of financial information; these cost systems helps in ascertaining the
actual and expected cost of each product. This helps interpreting this knowledge in the final
accounts of the company.
 Ascertain the cost of each product; it helps to ascertain the cost of each product and the
services thus helping the managers in the decision making approach (Ptak and Schragenheim,
2016).
 Ascertain the price of the product; these systems also helps in predicting the prices of each
product, the prices are either determine by the customers approach or by the organization itself.
 Cost reduction; the timely predicting and assigning cost to each product helps the company in
reducing the cost of the product and attains the economies of scale.
 Saving time and cost; it helps in saving per unit cost of the product. It also saves the time and
money of the organization.
The financial information of the company should be reliable and transparent because they bear
the real cost, and if they are produce in and uneven manner then they can lead to misleading of
the facts which is not good for the company. The financial information of the company creates
the value and goodwill in the eyes of the outsiders and the insiders. If any information is
presented in manner unpreventable manner than they can lead to misleading of the facts which
can give the insider trading, disclosure of confidential information to the competitors which can
directly affects the share price of the company.

It is important for the company to present any information of the company in an understandable
manner because this information are really confidential to the company point of view and all
these information creates the value addition like goodwill which directly effects the intangible
assets. This information cannot be presented in uneven manner otherwise they will prove a
disaster to the company accounts. They should be projected in a proper manner as like the
financial statements interpreted in the accounts (Booth, 2018).
Thus entire information of the company has some confidentiality and if they are predicted in an
uneven manner then they can lead to disclosure of financial information which is not good in
organization point of view.

D. Evaluate how management accounting systems and management accounting reporting is
integrated within organizational processes.
The management report and the management systems are correlated with each other. It is very
important for the organization to integrate them in the organization so that they can gain the
benefits to the organization, which they were not getting it before. The integration of these is
discussed below (Warren and Jones, 2018).
Management accounting systems; the management accounting system defines in interpreting all
the financial reports also consist of maintaining the accurate financial and the statistical
information of the company. This helps the managers in decision making approach.
Management accounting reporting; this is the report which consist making of the financial and
other reports of the company which includes the cost report, inventory report, budget report and
the performance report. These reports help the company in every aspect.
Particulars of management accounting
system and the management reports.
Integration of these reports in the
management.
Inventory management system and the
inventory management report
These reports must be integrated in the
inventory management that maintains and
records of stock
Price optimizing systems and the other
report.
These reports must be integrated in the pricing
policy of the business. They determine and fix
the price of the manufacturing goods and
services (Booth, 2018).
Cost accounting systems and the cost
reports
They must be integrated in the business to
insure the reduction in manufacturing and other
cost. For example allocating direct cost with

finished goods produced (Warren and Jones,
2018).

Task 2
A. 1) Explain absorption costing and marginal costing.
Absorption and marginal costing are two costing principles. In other words, these are two
approaches that are used to determine and arrive at the profit computed or determined as per
costing principles. One of the prominent features of these cost accounting or costing principles is
that profit arrived on the application of these both approaches can never be the same except in
the situation of no opening stock and no closing stock. Such situation may arise in a business
enterprise dealing in perishable goods or items. For reconciling the profit computed as per these
two approaches, a reconciliation statement is prepared indicating the reasons for such difference
in profits.
2) Prepare an Income Statement based on the calculations of costs using both a) absorption
costing method and b) marginal costing method.
Income Statement of Marginal Costing
Particulars Amoun
t
Amoun
t
Sales (55*600) 33000
Marginal Cost of Sales:
Opening inventory 0
Add: Cost of Production 12000
Less: Closing Stock 3000 9000
24000
Less: Variable distribution and administration cost
(1*600)
600
Contribution 23400
Less: Fixed Cost 3200
Less: Selling and administration cost 2700
Profit computed as per marginal costing approach
or technique
17500

Income Statement of Absorption Costing
Particulars Amoun
t
Amoun
t
Sales 33000
Cost of Sales:
Opening Inventory 0
Add: Production Cost (19*800) 15200
Less: Closing Inventory (200*19) 3800 11400
Gross Profit at normal 21600
Less: Variable Marketing and Administration 600
Gross Profit at actual 21000
Less: Distribution and administrative Cost 2700
Net Profit/Loss as per absorption costing approach or
technique
18300
Reconciliation statement
Particulars Amount
Profit as per absorption Costing 18300
Less: Difference in valuation of closing
stock
800
Profit as per Marginal Costing 17500
B.
Working Notes:
Calculation of Total variable cost:
Direct material cost=£13 per unit
Direct labor cost= £15 (3*5) per unit
Total Variable cost= £28 per unit
Contribution per unit= Sales- Variable accost
= £40-28

=£12
a. Number of products to be sold= FC/ Contribution per unit
= 6000/12
=£500
b. P/V ratio= Contribution/ Sales*100
=12/40*100
=30%
BEP (Sales) = FC/ P/V ratio
= 6000/30%
=£20,000
c. Contribution=16000
Sales Revenue to make profit £10,000=16000/30%
=53333
No. of products to be sold= 53333/40
=£1333
d. Margin safety when 800 products are sold
Sales=£32000
Contribution=32000*30%
=£9600
Margin of safety= 3600 (9600-6000)

=£3600

Task 3
Introduction
The given part of the report discusses the various aspects covering aspects of planning tools and
ways in which financial problems can be resolved. The concerned task has been divided into five
parts. Each part covers different branches of management accounting.
A. Explain the advantages and disadvantages of different types of planning tools used for
budgetary control.
Different types of planning tools are used as a budgetary control since they can be used to
control and measure the performance of a business enterprise. It is vital for any business
enterprise to understand different types of planning tools.
Each planning tools has several implications and leads to the achievement of organizational
goals and objectives. These tools play a major role in dealing with financial problems in an
organized and systematic manner. It is advisable for the finance manager or the concerned
responsible superior to undertake the supervision of all the possible alternatives in relation to
planning tools. Some of the widely used planning tools are budgetary control, correlation and
regression analysis, and capital budgeting analysis.
Capital budgeting is concerned with the detailed analysis and evaluation of the projects so that
the best appropriate and most suitable project can be selected out of the available projects. There
are various tools and techniques that can be used to analyze different types of projects. These
tools need to be dealt with care since decisions need to be taken solely on the basis of the
application of these tools (Warren and Jones, 2018).
The major advantage of capital budgeting as a planning tool is that it is a quantitative tool
compromising and calculating various parameters on which decisions regarding which whether
to accept the project or not will be considered or decided. Another advantage is that it also
considers the present value of the cash flows. On the other hand, the major limitations of capital
budgeting are that sometimes it becomes difficult to predict the cash flows due to which it
becomes unreasonable to estimate the cash flows.

Likewise, correlation and regression analysis is another widely used planning tool. These
planning tools are basically statistical tools used to identify the relationship that exists between
two or more variables. Such relationship is very crucial for decision making. It does so by
understanding each variable in detail. This will also indirectly help to overcome business
weaknesses properly and accurately.
For the better result, it is advisable to apply both correlation and regression so that a better
observation and interpretation can be obtained. This will foster to identify the unidentified
relationship. Thus, a prediction in relation to financial problems can be obtained. For this
purpose, proper knowledge of correlation is necessary.

B. Show the application of the planning tools for preparing, forecasting and analyzing
budgets.
Planning tools play a major and dominant role in the preparation, prediction as well as analysis
of budgets (Hemmer and Labro, 2016). Thus it takes all the steps to ensure that budgets are
prepared in the well-structured format or layout of the budget.
Planning tool helps to identify the objective of preparing the budget. It besides to determine in
aspects that need to be incorporated into the budget along with the assumptions on the basis of
which budget required to be prepared (Yalcin, 2012). This will facilitate a realistic and an
achievable budget. Also, all the department heads are required to prepare departmental budget
since they are well informed about the functions of their concerned departments or segments. For
instance, purchase department is required to draft and prepare purchase budget, sales department
needs to prepare respective sales budget and so on. Preparation of such budget directly facilitates
the preparation of the master budget. Such budgets help to identify the objectives of the
concerned business enterprise that needs to be achieved in the specified or given a time frame.
Analyzing the prepared budget is also importatnt so that variance analysis can be done in easilly
manner. Such analysis will help to prepare the future budgets since it is impossibe to achieve he
budgeted items in all financial items. Thus, it can be seen that planning tool is applied in
preparing, forecasting and analyzing different types of budgets.

C. Compare how your organization is different in adapting management accounting
systems to respond to financial problems.
ThirdWay Group needs to implement various branches of studies in its organizational structure.
Since, ThirdWay Group is concerned with the provision of construction services, it needs to
implement and follow cost accounting, job costing and process costing. This will help to place a
better control on the core activities in which the concerned ThirdWay Group is primarily
engaged. Focusing on non-core activities is not advisable to any business concern and
application of these management accounting principles will provide a solution to deal and
respond financial problems.
Application of cost accounting will help to place a better control on different types of costs that a
normally business enterprise incurs. Being ThirdWay Group a service oriented organization, it
needs to incur a wide variety of costs. A detailed classification of costs will help to determine
D. Analyse how your management accounting techniques could respond to financial
problems and lead the organization to sustainable success.
In the current scenario, capturing a significant market share as well as maintaining such acquired
share is a complicated and yet significant task. For this purpose, responding to financial
problems is a prerequisite activity (F.O., 2015). Thus, responding to financial problems can be
dealt with the application and assistance of management accounting tools. For instance results or
output obtained from financial management can provide useful information which can be utilized
to handle the finance related issues or problems (Allison, 2014).
In the same manner, preparation of fund flow statement along with cash flow statement can help
to identify the loopholes or flaws in the managements of funds including cash. This will
indirectly improves the cash flow position of ThirdWay Group in a smooth manner.
E. Evaluate how planning tools could be used to solve financial problems and lead the
organization to sustainable success.
Solving financial problems is the primary responsibility of every finance manager. Resolving
such problems leads to achievement of sustainable or competitive success. Different types of

planning tools play different types of roles in solving financial problems being faced by any
business enterprise. For example expense budget is used to gain an in depth understanding of
payment made towards different types of expenses during a particular period. Likewise, cash
budget helps to understand the cash inflows along with cash outflows.
Conclusion
The above report has been prepared to explain the role and importance of planning tools in
management accounting. It also explains how management accounting can be used in solving
and dealing with financial problems. As such, this task can be considered as the most important
part of the overall report since it is concerned with dealing with the financial problems. s

Conclusion
The given report has been divided into three parts, each part dealing with different aspects. This
is because management accounting a complex and a wide concept can be better understood with
the help of understanding in different parts. Also, it will help to understand the different
management accounting tools and techniques and its implications and significance in solving
crucial business problems. Besides, the discussion throughout the report can help to arrive at the
conclusion that management accounting needs to be followed and applied in almost every
business enterprise. This will help to earn higher amount of profits in the long run by satisfying
customers at the large and covering a wide variety of areas. Also, it does not mean that only
ThirdWay Group need to understand and implement the concept of management accounting in
its organizational structure.

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