Management Accounting: Principles, Techniques, and Budgetary Tools

This report discusses the principles and importance of management accounting, different accounting systems like cost accounting, job costing, inventory management, and price optimization, techniques and methods used for management accounting reporting, and advantages and disadvantages of budgetary tools like zero-based budgeting, operational budget, and master budget. It also compares how organizations are adapting management systems to respond to financial problems using benchmarking, key performance indicators, and variance analysis. Course code, course name, and college/university are not mentioned.

Unit 5 Management
Accounting

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Principles of management accounting and its importance to integrate management accounting
system within an organization.....................................................................................................3
Different techniques and methods used for management accounting reporting..........................4
Advantages and disadvantages of Budgetary tools......................................................................5
Comparing how organization are adapting management system to respond to financial
problems.......................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Management accounting is the accounting process of managing and preparing the
management and reports of the business organization which helps them to achieve the short-term
and long-term achievements. Eastern Engineering co. Ltd. Is a medium-sized enterprise in the
manufacturing sector in the United Kingdom. His report will outline the principles of
management accounting and its importance to integrate management accounting systems within
the organization. Further it describes the different techniques and methods for management
accounting reporting with examples and advantages and disadvantages of budgetary tools. At last
this report will outline the comparison on how organization are adapting management systems
respond financial systems.
MAIN BODY
Principles of management accounting and its importance to integrate management accounting
system within an organization
Management accounting principles are the set of rules which helps to make the proper
records of the management in the business organization. It helps the company to make the proper
decision, optimum utilization of resources, valuing the customers etc. in order to achieve the
organizational goal (Abdusalomova, 2019). Principles of management accounting are of two
types that are- principle of causality and principles of analogy. It helps the organization to
comply with the financial accountancy rules and guidelines. It is important to have separate
principles and guidelines in the company which helps the organization to earn good profitability.
Types of management accounting systems
Cost accounting system: It is also called product costing system and costing system
which helps the organization to estimate the cost of their products and to earn the profitability of
the organization (What is Management accounting, 2021). This helps the organization to know
how much cost is required in order to production of the products. Its includes cost from raw
materials to final product prepared. For example, Eastern Engineering co. Ltd. can prepare a cost
accounting from purchasing of the raw material till they have produced the final product for
selling. This will help company to know how much cost is needed.
Job Costing system: Job costing system of accounting involves the process of estimating
and accumulating the cost of every specific work in the organization (Javed, and Malik, 2021).

This is prepared to know the value of each job which makes the company to know about its
accuracy in the market. The organization can use this system and must have information of every
job which helps to manage the costing of each job in the company.
Inventory Management system: This system helps the company to have the record of
their inventory in order to have proper supply of goods in the competitive market (Tejesh and
Neeraja, 2018). It keeps the records of raw material purchased to good sold in the market by the
cited organization. For example, the organization is making 1000 units and it has sold 850 units
in the market so this accounting helps the company to know the remaining unit left in the
inventory that is 150 units.
Price Optimization system: The price optimization system helps the company to know
and calculate that how the change in price of the product changes the demand of the products.
This makes Eastern Engineering company to know about the quantity of goods to be produced
by them. For example, the company is producing 1000 @ 30 per unit and selling at 35 per unit,
but due to increase in demand the production increases and now cost is 25 per unit to the
company. So company will reduce its cost from 35per unit to 30 per unit.
Different techniques and methods used for management accounting reporting
Management accounting report is prepared in order to plan, regulate, make decisions and
measuring the performance of the company (Puspaningtyas, Putri and Kamaludin, 2019.). This
report are prepared on continuous basis in order to meet the profit of the company. The
organization must prepare the management accounting reports in order to maintain proper
accounts of the company. Types of management accounting report are as follows:
Cost Managerial accounting report: This report includes the cost of manufactured
goods in the organization. It includes cost of raw material purchased, overheads, labours, wages
and salaries or any other cost if required in order to produce the goods (Sulindawati, 2017). By
doing this company can use to analyse the profit margin of their products. The organization can
use this system in order to know the profit of their business organization. For example, the cost
of raw material is 50 per unit, labour is 20 on per unit and the company is selling that product at
100 per unit. So, the profit margin of the company is 30 per unit.
Budget report: This report is very important for the company in order to measure the
performance of the company. It decides the overall budget of the company to make the company
know how much of capital is required in order to do production (Chaocui, 2017.). The

organization should make the budget report to check the overall capital required by company.
For example, budget is prepared for doing manufacturing of goods which makes company to
know the exact capital required.
Inventory report: This report is the summary of the good produces to good sold to the
retailer's. This keeps the record of the products like how much quantity left in inventory,
products selling fast from inventory and products needed to be produced more. Basically it
shows the status of the inventory of the organization. This report helps the organization to do
production of that good which are in high demand. For example, inventory consist of Product 1
and Product 2, but Product 2 selling more in the market. By this organization will produce
Product 2 in their organization.
Account receivable ageing report: If the company is mostly extending on credit, then
company must maintain account receivable ageing report. This helps the company to know that
who has given payment and who are remaining to pay to the company. If the creditors are not
paying than company must maintain a strict policy regarding the credit policy which helps them
to receive the proper accounts records without any deficiency in payment system.
Advantages and disadvantages of Budgetary tools
There are various types of budgetary tools which the Eastern Engineering Co. Ltd. must
consider in order to make the proper budgeting in their business organizations. Some of them are
as follows:
Zero-Based budgeting: This budgeting was developed by the Peter Phyrr in late early
1960s and 1970s. This makes the company to start its every new budget with the zero as the base
(What are the different types of business budgeting methods?, 2021). This makes the
organization to justify its new expenses by making the new budget for each new project. There
are some advantages and disadvantages of this are:
Advantages
1. Managers should justify the operating expenses of the company which makes
them how mush to spend in each project. This budget helps to know that in which
areas more revenue is required.
2. As expenses of every product changes so it is beneficial to start the budget from
the base as the zero.
Disadvantages

1. It takes lots of time in order to make new budget for each project. As it is totally
new project as no modification is done with the previous budget.
2. The budget may be valid for the short-term analysis only.
Operational budget: An operational budget is the plan of the company's financial
obligations which makes the company to survive and grow over a period (Schmidgall and Kim,
2018). This makes the company to know that in which areas the company requires more cash.
The cited organization must prepare this budget as it has some advantages and disadvantages.
Advantages
1. This budget helps the organization to make the long-term planning goals and to
allocate the resources properly.
2. This budget is flexible as company can do changes according to the requirements.
Disadvantages
1. It is time-consuming process as it requires lot of time to prepare this budget and to
allocate resources for every task.
2. It can be changed if required by the company so it has lack of inaccuracy.
Master budget: A master budget is the sum of all budgets prepared by the organization. It
also includes the financial planning, cash flow statements, profit and loss account statement and
balance sheet of the organization. The organization must prepare the master budget as it helps to
review the summary of all prepared budget.
Advantages
1. There is masterly planning of all the budgets prepared in the organization.
2. It includes all the account records of the company in order to have best budget.
Disadvantages
1. There is lack of specificness in the master budget as it is the sum of all the
budgets.
2. It becomes difficult to read and understand that budget because it is mixture of all
other budget.
Comparing how organization are adapting management system to respond to financial problems
Financial problems refers to the problems of the organizations in which company is
unable to pay its debts in the short-term as well as long-term. It is negative situation of the
company as company will not able to pay out its bills whenever necessary. There are many

factors which helps the company to adapt the good management system in the organization
which are as follows:
Benchmarking: Benchmarking is the process of doing comparison of business process
and metrics of the performance which helps the company to have best practices from the other
firms (Holm, 2019). It is also called process benchmarking or best practice benchmarking which
evaluates the various aspects of the company in order to have best practices. Eastern Engineering
Co. Ltd. can use this practice if they are having financial problem. It makes the company to
compare the business process with business performances.
Key Performance Indicators: These indicators helps the company to determine and
measure the performance in comparison to the planned targets and objectives of the company. It
keeps the records of sales and revenue occurred in the organization (Hinderks and et.al., 2019).
The firm can use this factor in order to determine and measure the achieved goal with the
planned goal. It main aim is to keep the record and check the operational performance of the
company.
Variance analysis: This analysis is the quantitative checking of the actual behaviour of
the company with the planned. The variance can be related to purchase, labour rate, overheads,
material yield etc. It is not possible for the company to track all the variances (Dai and et.al.,
2021). The company can keep record of the variances which are important in order to meet the
financial problem.
Comparison between the organizations
Eastern Engineering Co. Ltd. Hichrom company
This company uses the key
performance indicators because it helps
the company to compare its planned
goal with actual goal. It makes the
company to keep the records of the
sales and revenue which decreases the
financial performance of the
organization.
On the other hand, this organization is
using benchmarking system in order to
meet its financial problems. This factor
is used by the company it makes the
company to have comparison between
the process of the business and
performance metrics. This makes the
company to pay out the bills on time.

CONCLUSION
From the above study it has evaluated the principles of management accounting and
various accounting system like cost accounting system, job costing system, inventory
management system and price optimization system with examples. Further, it describes the
different techniques and methods used for management accounting reporting like budget report,
cost managerial report, inventory report etc. with examples. The company uses this method in
order to have good management accounting in the business organization. Furthermore, it
describes the various types of budgetary tools like zero based budgeting, operational budget and
master budget with its advantages and disadvantages. At last, this report shows the management
system in order to respond to financial problems by comparing with other company.

REFERENCES
Books and Journals
Abdusalomova, N. B., 2019. DIRECTIONS FOR DEVELOPMENT AND IMPROVEMENT
OF A MANAGEMENT ACCOUNTING SYSTEM. Economics and Innovative
Technologies. 2019(3). p.6.
Chaocui, W., 2017. A Brief Discussion on the Comprehensive Budget of Industrial
Enterprises. Journal of Finance Research. 1(1). pp.45-51.
Dai, M. and et.al., 2021. A dynamic mean-variance analysis for log returns. Management
Science. 67(2). pp.1093-1108.
Hinderks, A. and et.al., 2019. Developing a UX KPI based on the user experience
questionnaire. Computer Standards & Interfaces. 65. pp.38-44.
Holm, L., 2019. Benchmarking fold detection by DaliLite v. 5. Bioinformatics. 35(24). pp.5326-
5327.
Javed, S. and Malik, M., 2021. The propensity of risk-taking and financial efficiency: Exploring
the role of management accounting system: Evidence from the manufacturing
sector. Cogent Business & Management. 8(1). p.1954490.
Puspaningtyas, M., Putri, D. M. and Kamaludin, M., 2019. DEVELOPING A BUDGET
REPORT INSTRUMENT FOR SMALL MEDIUM ENTERPRISE’S IN EAST
JAVA. International Journal of Advanced Research in Economics and Finance. 1(3).
pp.11-17.
Schmidgall, R. and Kim, M., 2018. Operating budget processes and practices of clubs: a repeated
cross-sectional study over four decades. Journal of Quality Assurance in Hospitality &
Tourism. 19(4). pp.476-494.
Sulindawati, E., 2017. An analysis of instructional material need for improving students’ ability
in writing cash flow report. Vol. 134. pp.146-152.
Tejesh, B. S. S. and Neeraja, S. J. A. E. J., 2018. Warehouse inventory management system
using IoT and open source framework. Alexandria engineering journal. 57(4). pp.3817-
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Online
What are the different types of business budgeting methods?. 2021. [Online]. Available through:
<https://getdivvy.com/blog/types-of-business-budgeting-methods/>
What is Management accounting. 2021. [Online]. Available through:
<https://www.freshbooks.com/hub/accounting/management-accounting?fb_dnt=1>