Management Accounting Systems and Techniques

This document provides an overview of management accounting systems and techniques used in organizations. It covers the types and benefits of these systems, their integration with the organizational process, methods used in management accounting reporting, different types of costing techniques, planning tools used in management accounting, and methods used in management accounting for responding to financial problems.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
LO1 .................................................................................................................................................1
Types and benefits of management accounting systems and its application in organisational
context..........................................................................................................................................1
Integration with the organisational process.................................................................................3
Methods used in management accounting reporting. .................................................................3
LO2 .................................................................................................................................................4
Different types of costing techniques used by GSK ltd...............................................................4
LO3..................................................................................................................................................5
Different types of planning tools used in management accounting ............................................5
LO4 .................................................................................................................................................7
Methods which organisation uses in management accounting for responding to the financial
problems. .....................................................................................................................................7
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Management accounting is the process where internal systems are used by organisation
for measuring and evaluating the process for management of organisation. Management
accounting has been used by organisation for achieving sustainable growth and success in the
organisation. GSQ is a manufacturing concern on which present report is based. Report will
cover meaning of management accounting and different types of management accounting
systems used in the business with their benefits and limitations and their application in the
organisation. It will cover the methods used for management accounting reporting. Different
techniques of costing used in management accounting will also be explained. Also t will give an
understanding about the management accounting planning tools and the use of management
accounting in solving financial problems.
LO1
Management accounting
Management accounting involves preparation and making available the financial &
statistical information’s to the business managers for carrying out managerial decisions for day
to day activities of business (Bui and De Villiers, 2017). It is different from financial accounting
as management accounting is of importance to internal management where the financial
accounting is for external reporting to stakeholders.
Types and benefits of management accounting systems and its application in organisational
context.
There are different types of management accounting systems which are used by GSQ ltd.
Inventory Management Systems
Inventory management is a technological and process & procedures combination which
oversee maintenance and monitoring of the stocks, whether the stocks are related with the assets
of company, supplies, raw materials or the finished products manufactured by the organisation
for sale to customers. Inventory management is widely used process that is essential for keeping
track of the movement of inventory within the processes and out of the organisation. The
methods used in inventory management are just in time and material requirement planning
Just-in-time-
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In this method organisations do not tend to store the stocks of inventory in the organisation.
Inventory is made available on demand by the production departments which saves the carrying
cost and risk of becoming outdated.
Material Requirement Planning-
In this method company stores the inventory that cannot be made ordered on urgent basis.
This involves planning about the requirement of inventory base on the previous trends. Bulk
purchases provide discounts.
Benefits
 Inventory management systems helps GSQ to have proper record of all the movement of
inventory.
 It also helps the company to reduce its costs using the approaches like just-in-time and
MRP.
 Inventory prevents interruptions in production process as it helps company to order in
time.
Application
Inventory management is applied in the production process for ordering the materials as
and when required (Hiebl, 2018). It helps GSQ in having proper record of the inventory stored in
warehouse.
Cost Accounting Systems
Cost accounting systems refers to recording all the costs incurred in manufacturing a
product. It account for all the direct and indirect costs associated with the product. Cost
accounting systems estimates the profitability of every item manufactured. It provide and
important base to management of GSQ for decision-making. The costing methods are direct cost
Direct costing – In this costing systems only variables costs associated with the products are
considered. Fixed costs are treated as period cost incurred during the period.
Standard costing – It refers to costing method in which actual output are compared with the
budgeted output. Corrective measures are taken for reducing the variances.
Benefits
 It helps the management in implementing improved methods for reducing the cost.
 It aims at identifying the reasons of variances between the outputs.
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 Cost accounting helps GSQ in deciding its profit margins based on the cost information
derived.
Application
Cost accounting is applied by GSQ in the manufacturing processes for recording all the
variable and fixed costs incurred for producing a product and keeping the costs under control.
Job Costing Systems
Job costing refers to the process of collecting informations related to costs which are
associated with specific productions or the service job. The information helps in providing
costing information to customers under contracts where cost is reimbursed. It is also referred as
method where the costs the costs are compiled for work order or job (Granlund and Lukka,
2017).
Benefits
 It helps GSQ in identifying profitability of each job separately.
 Costs of similar jobs can be estimated on the information available from existing jobs.
 Detailed analysis of costs helps in taking cost control measures.
Application
It is applied in processes for identifying the cost of contractual specific products by GSQ.
It provides detailed cost information for manufacturing product separately.
Integration with the organisational process.
The above management accounting systems are used by the GSQ for having proper
management of the products or services produced by company. Integrating these systems with
the production processes helps the company in managing the costs and keeping them under
control to the extent possible.
Methods used in management accounting reporting.
The management accounting reports provide important information for taking strategic
and operational decisions.
Budget Reports
Budget reports are prepared by the organisation before the start of the production process.
These reports are the spending plans of company about the future activities and operations of
company. It provides clear structure for the organisation to follow. The budget reports are
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prepared based on the previous budgets and information. Managers make adjustments related to
inflations, demand and other factors in the current budgets. This helps GSQ in proper allocation
of resources among various processes and activities.
Cost Accounting Reports
These reports cover all the information regarding the costs that are related with
manufacturing of products or services. It contains detailed information about the all the items of
costs separately. On the previous trends forecast about the future income and revenues are made
and resources are allocated accordingly. They help the managers of GSQ in deciding the profit
margin for each product. The information is very useful for decision making on the variances
between the budgeted and actual results. On the basis of this reports strategic policies and
procedures are taken.
Performance Reports
The performance reports contain the analysis of the performance of company and it
operations. They provide the company whether the targeted level of performance has been
achieved or not. If the performance targets are not achieved than company may take corrective
measures for increasing the efficiency and productivity. These reports also assess the
performance of individual and employees that helps company in rewarding them for future
growth and success.
LO2
Different types of costing techniques used by GSK ltd.
Marginal Costing
Marginal costing refers to the accounting technique where the amount at the given
volumes of outputs by which the cost in aggregate could be changed if volume of outputs are
decreased or increased by 1 unit. Marginal costing technique is used for identifying and
evaluating the cost of product being manufactured within the organisation. This costing
technique only considers the variable cost associated with the products. Fixed costs under
marginal costing are treated as period cost and are not included in product cost.
Advantages
 The marginal costing is used in management decisions as comparison is possible. Linear relationship between variable cost and output may not be accurate.
Disadvantage
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 Fixed costs are considered period costs.
 Company may face difficulty in segregation of cost between variable and fixd.
Absorption Costing
It is a costing method which is used by organisation for measuring the cost of products. It
is also known as the full costing method. The costing methods accumulates all the cost
associated with production process & apportion them to individual products. All the variable and
fixed overhead are absorbed by the units produced. This costing method includes both variable
and fixed manufacturing overhead in the product's cost.
Advantages
 The method considers both variable and fixed cost in product cost.
 The method is accepted by the accounting standards This provide more accurate and reliable information.
Disadvantage
 It is not useful for decision-making purposes.
 Comparison of two products cannot be made in this costing.
Report of costing under marginal and absorption costing
Marginal Costing
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Cost card using Marginal costing
Particulars Cost per unit
Direct Material 8
Direct Labour hour 3
Variable production overhead 2
Marginal Cost 13
Selling Price 30
Marginal Cost 13
Contribution Profit Margin 17

Absorption Costing
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Cost card using Absorption Costing
Particulars Cost per unit
Direct Material 8
Direct Labour 3
Variable production overhead 2
Fixed production overhead 3.2
Absorption Cost of the product 16.2
Selling Price 30
Total Cost 16.2
Profit 13.8
Profit or loss statements using Marginal costing
Amount
Sales Revenue 50000*30 1500000
Marginal cost of sales
Direct materials (50000*8) 400000
Direct Labour hours (16667*9) 150000
Variable production overhead (50000*2) 100000 650000
Contribution 850000
Fixed production overhead 160000
Selling expenses variable (50000*4) 200000
Fixed admin and distribution 60000 420000
Net Income 430000

LO3
Different types of planning tools used in management accounting
Operational Budgets
It refers to he forecast about the expenses and revenue for single or more periods.
Operational budgets are formulated typically by management of company prior to beginning of
years. It provides the expected level of activities of business. It provides the management of
GSQ a structured framework to be followed. They enable the company to keep the workforce
and operations in right directions (Latan and et.al., 2018). On the basis of these budgets the
manufacturing process is monitored with increased efficiency and reducing wastages and more
effective utilisation of the available resources by company.
Advantages
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Profit or loss statements using Absorption costing
Amount
Sales Revenue 50000*30 1500000
Marginal cost of sales
Direct materials 400000
Direct Labour 150000
Variable production overhead 100000
Fixed production overhead 160000 810000
Gross Profit 690000
Selling expenses variable 200000
Fixed admin and distribution 60000 260000
Net Income 430000

The operational budgets helps the management of GSQ to keep the costs of operations
within control. It helps the business to forecast about the future incomes and expenses on
previous trends.
Disadvantages
The long range planning may be not accurate as they are based over the estimates. There
are various factors that are not considered. Wrong forecasts can affect the operations of
company.
Flexible Budget
It is defined as a budget which flexes or adjusts according to the changes in activities or
volume of output. These budget are more useful and sophisticated than the static budgets. In
static budgets amounts could not be changed. They remain same as they were when approved.
Flexible budgets provide the scope for company to make required changes as required by the
management. Business operates in a dynamic environments where the changes are required to be
made for responding to these changes in the budgets. This become more easy for GSK to make
adjustments without affecting the whole budgets and operations.
Advantages
Flexible budgets allow the company to make adjustments in the budgets for responding to
the changes. It is more preferred by GSK in its management as it more easily adapts the financial
needs of company. Requirements are reflected in budgets in advance.
Disadvantage
Changes in the budget may affect the management of resources. It makes difficult for the
company to disagree with changes. Department makes the changes to budget on their own which
may not be essential (Quattrone, 2016).
Cash Budgets
Cash budget is referred as the budget containing the information about the cash inflow
and outflow. This budget contains information about the monetary funds. It represents where and
how much cash is allocated to the activities. It ensures that sufficient funds are allocated to the
departments and operations carrying out proper analysis of the budgets. These budgets enable the
GSQ in identifying whether it will having sufficient funds for carrying out the operations or not.
On the basis of this budget company makes necessary arrangements of the funds so that
operations are not interrupted.
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Advantages
Cash budgets helps company in proper allocation of funds among departments on the basis of its
budgeted productions. This helps company to identify the requirements of monetary funds so that
it can make available the required funds.
Disadvantage
If the budgets are not forecasted by making proper analysis of the past trends it can affect the
business. Less estimates will lead to insufficiency of funds and higher estimates will be leading
to finance cost.
LO4
Methods which organisation uses in management accounting for responding to the financial
problems.
A business runs in a dynamic environment and it is not possible for the company to operate
without adopting to the environment. Some of the issues can be controlled by the management
like scarce resources, collection problems, insufficiency of resources and like issues. The
management accounting methods can be used by GSK for adequately responding to these
financial problems.
Benchmarking
Benchmarking refers to setting targets and goals that are realistic and achievable. The set
goals and targets provide the management to work for achieving them. The achievable goals
boost the confidence of employees and motivate them to perform better. If the goals are realistic
and achievable, this would not be causing much variations in the budgets and actual figures. Gsk
can provide incentive and rewards for achieving the goals.
Key Performance Indicators
The Key performance indicators are the measurement used for evaluating success of
organisations, processes, activities, employees etc (Bromwich and Scapens, 2016). The objective
of key performance indicators is to identify whether the targets are achieved or not by the
company. KPI is used by GSQ for analysing its performance and requiring the company. If the
targeted objectives are not achieved than corrective measures are taken for improving the
performance of company. These covers setting sales targets, profitability, working capital and
like factors.
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Governance
It includes monitoring and controlling the activities of business. It refers to have
structured rules and regulation and policies for carrying out the work and activities. The
management of company is required to monitor all the activities and processes so that the
wastages are reduced and resources are used efficiently avoiding the wastages. Company by
keeping control systems in department can ensure that the defected or bad quality material are
identified at entrance. This saves time and wastage of resources.
CONCLUSION
The above report concludes that marginal costing is very important for the organisation.
All the business operations are carried out as per the rules and guidelines of management
accounting. It provides different management accounting systems for effective management of
business. The reporting methods provide the base for improving the performance of company.
The company with planning tools make forecast that helps in effective utilisation of resources.
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REFERENCES
Books and Journals
Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years
on. Management Accounting Research. 31.pp.1-9.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research.31. pp.118-122.
Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms:
Reviving contextuality in contingency theory based management accounting
research. Critical Perspectives on Accounting.45. pp.63-80.
Soderstrom, K.M., Soderstrom, N.S. and Stewart, C.R., 2017. Sustainability/CSR research in
management accounting: A review of the literature. Advances in management
accounting, 28, pp.59-85.
Hiebl, M.R., 2018. Management accounting as a political resource for enabling embedded
agency. Management Accounting Research. 38. pp.22-38.
Bui, B. and De Villiers, C., 2017. Business strategies and management accounting in response to
climate change risk exposure and regulatory uncertainty. The British Accounting
Review, 49(1), pp.4-24.
Latan, H. and et.al., 2018. Effects of environmental strategy, environmental uncertainty and top
management's commitment on corporate environmental performance: The role of
environmental management accounting. Journal of Cleaner Production.180. pp.297-306.
[Online]. Available through : <>.
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