Management Accounting Principles, Techniques and Budgetary Tools

This report discusses the principles of management accounting and the importance of integrating management accounting systems in an entity. It also covers various techniques and methods used for management accounting reporting, advantages and disadvantages of budgetary tools, and how organizations are adapting management systems to respond to financial problems. The report includes case studies of Eastern Engineering Co. Ltd. and Aston Martin Ltd.

UNIT 5 ASSESSMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
PRINCIPLES OF MANAGEMENT ACCOUNTING....................................................................3
TECHNIQUES AND METHODS FOR MANAGEMENT ACCOUNTING................................4
ADVANTAGES AND DISADVANTAGES OF BUDGETARY TOOLS....................................6
MANAGEMENT SYSTEMS..........................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting is a branch of accounting in which a set of accounts are made to
assist management in taking decisions (Oyewo,2021) The report will be discussing principles of
management accounting and how installation of management accounting and how it is important
to be integrated in an entity. Different techniques and methods used for management accounting
reporting will also be discussed. The report would also discuss advantages and disadvantages of
the budgetary tools and how they play key role in the organizations. At the end of the report how
organizations are adapting management systems to respond to financial problems will be deeply
observed.
PRINCIPLES OF MANAGEMENT ACCOUNTING
For the companies like Engineering Co. Ltd. It is essential to manage their accounts in
such way so can help the management of all stages to take better and relatively appropriate
decisions pertain to their domain. The principles of management accounting are as follows-
Materiality- While accounting for management the data must be material means may impact the
decisions of the management and can also be used for serving different managerial purposes
(Burger and Middelberg, 2018)
Objectivity- The provided management accounting data must have objectivity in the case while
getting collected the purpose of collection must be clear and as per requirement it must be
extended.
Verifiability- The accounting information must have this characteristic, for checking the
authenticity of the information is only possible by verification of the information since at last this
information are used for making key decisions in the business.
Impartiality- The collected information must have this significant characteristic. It must present
clear and unbiased picture of performance of management. So by using these statements the
organization may take more impactive decisions (Lebedev, 2018)

In modern business environment businesses are heavily impacted by the decisions of the
management so with this regard it is essential for the businesses to integrate management
accounting system.
Management accounting system helps in pointing out the areas where management may
go for further improvement. For example- The Eastern engineering co. Ltd. Who is operating in
the market. In the engineering line there is a huge competition in the market. So a minute
mistake may throw them out of the competition. It helps the company in assessing the current
scenario and can go for further improvement in management.
Planning new products also becomes easy by integrating management accounting. For
example- The Eastern Engineering Co. Ltd (Kiamehr and Gharehkhani, 2019.) wants to expand
its operations in the market then management accounting may suggest it in more professional
and rational way. By going through cash flow statements, ratios or other such data the
organization would be in position of making more drastic and appropriate decisions.
Helping to understand key components- For example Eastern Engineering co. Ltd wants
to know more than just profit and loss then management accounting will be helping to know
about position of cash flows, fund flows and what is the progress of budget and how the
organization is doing compares to their performance of previous years.
TECHNIQUES AND METHODS FOR MANAGEMENT ACCOUNTING
There are ample number of such techniques and methods which are used for management
accounting so can provide the best set of information for management so on the basis of it they
can make affective decisions. The techniques are as follows-
Cash flow analysis- this is the report in which the management is given information relevant to
cash flows in the organization. In this statement how the cash got fluctuated throughout the year
or in a certain period is shown. Which helps the management to understand the flows of cash in
respect to finance, operations and investment (Wu and Wang, 2020,)

Example- If Eastern Engineering Co. Ltd. Wants to know more about their cash flows in
financial activities then this statement will be helping them to know all key elements.
Fund Flow analysis- This is the statement which shows the position and flow of the funds. It is
generally measured on the monthly or quarterly basis. Here sources of funds and applications of
funds for a particular period are taken in to consideration (Korobeynikova, 2021,)
Standard Costing- This is the technique which is used to know the variances with respect to
various cost factors. Like what was the decided cost and what has been the actual cost are
compared and variances are enumerated.
Example- For controlling the cost Eastern Engineering Ltd may use this technique on the basis of
it the management may take prominent decisions like managing various costs.
Capital budgeting- This is very prominent technique which is used to figure out the exact
avenue of investment, Since while making big investments it is important to analyse the
available sources, at once if the amount invested then can not take the steps back.
Example- The Eastern engineering Ltd goes for enhancement or new plant set up so capital
budgeting technique will help them to decide the right avenue so can avoid risk factors (Hege,
Brimont and Pagnon, 2019)
Trend analysis- Trend analysis helps to know the trends of the company and its key components
which aids management to know the trends of all those components on the basis of they can
make predictions and can also take advantage.
Inventory analysis- This is one of the most salient technique, in which inventory is valued by
considering different methods like- FIFO, LIFO, HIFO (Manolov, 2020) etc. It is essential for
the management to control the inventory since it helps to reduce the cost of restoration and also
management of working capital.

ADVANTAGES AND DISADVANTAGES OF BUDGETARY TOOLS
There are multiple types of budgetary tools which helps management to carry out the
technique of budgeting with more affective way. The tools are used as per the predicaments and
requirements of the circumstances the advantages and disadvantages of the tools are as follows-
Incremental budgeting- Here the figures of last years are used and as per the trend of current
years a few adds or subtractions are inculcated. This is simple and easy to perceive.
Advantages- (Solyannikova, 2019)
 This is one of the easiest methods in which there is no need to make the current year
budget in fully fledged manner. For such organizations where cost drivers do not get changed from year to year this
works efficiently.
Disadvantages-
 This is more likely to perpetuate inefficiency.
 There is a huge scope for budgetary slack since this is based on the data of previous year.
Activity-based budgeting- This is top to down budgeting approach. In this budgeting for the
decided outputs, inputs are determined by the organization (Patyukova, 2018)
Advantages-
 If the activities of the organization are predetermined then it is easy to apply.
 Here all the key activities are taken into focus. This helps to form budget for operations.
Disadvantages-
 If the outputs are not well determined then this budget will get failed.
 This is top to down and just determine for activities separately so not suitable as a whole.
 Here firstly the activities are traced and then it is assessed that for carrying out certain
activities what amount of cost would be needed so if the activities are not well articulated
then would result wrong.

Value proposition budgeting- Here It is determined that why some amount is included in
budget and how it will add value to the customers or staff, other stakeholders.
Advantages-
 It compares both cost and value to reach to better final conclusion.
 More balanced or rational tool of budgeting since the mean of budget gets clear at
beginning (Luchkin, 2020) This tool pays attention on that every and each release of cost must pour out valuable to
someone.
Disadvantages-
 This tool of budgeting is not directly aims the main goal or objective for which this entire
activities are happening.
 It focuses on avoiding unnecessary expenditures but some time those activities which not
pour out values immediately get avoided which may cause damages in the nearest future.
Zero based budgeting- This is the tool in which the assumption is taken that all the budgets in
an organization must get prepared form zero or beginning. There should not be incremental type
of approach to just re fabricate previous budgets (Goswami, 2019.)
Advantages-
 No use of previous budgets helps in forming absolutely new with proper inculcation of
current circumstances.
 It is best suited for such entities which are facing so many fluctuations in the market in
different ways. For addressing discretionary costs this is the best budgetary tool.
Disadvantages-
 Previous data are not considered which may be helpful sometimes in making more
appropriate predictions.
 Over time-consuming budgetary tool.

MANAGEMENT SYSTEMS
A management system is a constellation of practices, processes, policies which is used by
organizations to make sure its tasks in order to achieve the objectives. Here the risks are
identified and get resolved to lead the organization toward their aim.
Management
system/organization
Aston Martin Ltd. Eastern Engineering co Ltd.
Financial problems-
1) Cost of capital is
one of the biggest
peril for the modern
organization due to
the vast amount of
market capital they
invest with this
regard the company
is also having this
financial issue to
manage its cost of
capitals.
Solution-
For resolving the issue the
company has installed well
articulated management
reporting system in which
statements like cash flow
statements and fund flow
statements will be maintained. It
will be helping management to
control their cost of capitals.
Like the cash flow statement
helps to know the financial
flows in a certain period of the
time (Alexander, 2018)
Solution-
In the management system the
management of the organization may
pay attention on capital budgeting as
well it will be enabling them to decide
the best alternative for making bigger
of capital investments for instance
(Safarani, 2018) if the organization
wants to expand its business operations
and for this purpose having so many
avenues or alternatives so which one
of them is more lucrative can be
assessed by capital budgeting and it is
helpful to make better investments
which reduces the cost of capitals.
2) Higher
operational cost is
one another big
financial problems
before the
organizations. The
companies are facing
The management system of the
entity is well articulated for
resolving this issue. The
management system of the
organization consists tools for
working capital management.
Eastern engineering Ltd practices
budgetary control in its management
system so it makes budgets for all
prominent components of operations.
Like cash budget, sales budget,
expenditure budget, revenue budget,
inventory budget etc. which helps it to

the problem of over
operational costs
which is due to many
reasons mainly poor
control on the
operations or may be
weak management of
working capitals
(Boehmer, 2020)
Aston martin which is also an
engineering company timely
makes funds flow statements,
which depicts entire picture of
working capital of the
organization. Here they are
controlling cash, account
receivable, account payable and
inventory so can manage their
operations as well.
control the operations and also in
making drastic decisions with this
regard (Xiong, 2020)
Along with it for managing working
capital it timely revises its policies
with regard to short term funds and
debts so management system may
proceed with greater efficiency.
CONCLUSION
From the report above it can be concluded that the principles of management accounting
are important for the organization to integrate management accounting systems since it enables
them to proceed it with higher efficiency. The report had under looked various management
accounting techniques and methods for the Eastern engineering company how they perform their
significant role to assist management of the organization, Also various budgetary tools and their
pros and cons have been discussed to full length. At the end of the report it had been deeply
evaluated that how organization were using different management systems in order to respond
various financial problems within their organization, with this regard two entities Eastern
engineering co Ltd and Aston Martin Ltd which is also working in the same business lines were
taken into consideration.

REFERENCES
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