Management Accounting: Meaning, Types, and Importance

This document provides a comprehensive guide to management accounting, including its meaning, types, and importance. It explains how different accounting systems and reports are integrated into the business process. The document also covers concepts such as cost analysis, flexible budgeting, absorption costing, and marginal costing. It includes a problem-solving section on income statement under absorption and marginal costing.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................7
TASK 3 .........................................................................................................................................14
TASK 4 .........................................................................................................................................17
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Accounting, reporting and evaluation form management perspective is recognised as
management accounting. the structure of management accounting remains different to different
organisations (Bromwich and Scapens, 2016). The report is prepared to illustrate the meaning
and essential requirement of management accounting in Alpha Limited. Company manufactures
and deliver pizza to customers in the UK. The use of different type of management accounting
reports for addressing the information form accounting systems are explained in the prosed
organisational context. with the precarious use of cost management accounting techniques as
marginal and absorption costing technique profit and loss of organisation is ascertained. How
planning tools assist the budgetary control process with advantages and disadvantages elaborated
properly. At last, the concept of financial governance extracted in order to identify the financial
challenges and comparison made with practical implementation of management accounting
system in organisational context.
MAIN BODY
TASK 1
Management accounting- This is an accounting process that is related to collecting monetary and
anti monetary information from different aspects. The goal of this accounting is to produce
internal managerial report for use of managers in order to take suitable actions to achieve goals
and objectives.
Definition of MA:
According to Charted Institute of Management Accountants (CIMA), MA is the way in which
managers recognise, analyse, produce, describe the information needed to prepare and control a
corporate entity (Maas, Schaltegger and Crutzen, 2016).
Importance to integrate MAS with organisations:
This is essential for companies to align their activities and operations with various
accounting systems. It is necessary to connect the cost accounting process, for example for the

finance department, so that costs can be regulated. Inventory management system may also
direct the department of production to meet to control the total stock.
Management accounting system- The MA system can be defined as those which are linked to
each and every department of business entities. These systems play a key role for companies for
guiding in an effective manner to accomplish predetermined goals.
Difference between MA and financial accounting:.
Management accounting Financial accounting
Under this accounting both types of information
is included such as monetary and non monetary
aspects.
On the other hand, in this accounting only
financial information is included.
As an outcome, in this accounting internal
reports are prepared.
While under this, various financial statements
are produced.
This accounting does not follow any specific
accounting time period or rules.
While this is based on completely rules and
regulations which are set by IFRS.
Different types of accounting systems:
 Cost accounting system - Through regularly tracking entire financial transactions, this
accounting system is concerned with managing total spending. It is important for
companies to continue the price of each product below the standard cost. Most of the
companies face the issue of higher costing and as a result issue of lack of funds raise. In
this aspect, this accounting system plays a key role in order to track overall costs such as
direct cost, indirect cost and many more. In the aspect of Alpha limited company, they
apply this accounting system with an objective of tracking overall expenses and try to
keep these costs below the standard costs.
 Inventory management system - The quantity of various materials contained in this
accounting system is measured by methods such as LIFO, FIFO, etc. This accounting
system is necessary for departments of output to intervene on the manufacture and
purchase of new products (Messner, 2016). It is mostly used in those business entities in

which portfolio of products is too wide. As well as this accounting system contributes in
order to keep the cost of storing material in warehouses. Hence, this is essential for
companies for managing different forms of materials in an effective manner. In the above
chosen business entity Alpha limited, they apply this accounting system to track the
usage of available quantitative aspect of their raw materials.
 Job costing system- Under this accounting system, the cost of each item generated is
assessed by evaluating the cost of work involved in different practices. For those
companies producing a wide variety of products, it is important. This is used in the
companies wherein number of products are larger. Hence, this is compulsory for
companies in order to track cost of each individual produced unit. In Alpha limited
company, their accounting department makes significant use of each job cost involved in
completing tasks through this management system.
 Price optimisation system -This accounting system operates in compliance with a
purposeful method that begins with the collection of user feedback on prices. Depending
on this, firms updates their pricing and selling strategies (Hall, 2016). This is crucial for
businesses whose revenue is falling because they are revising their prices by helping
them to impact their sales. So overall, this is necessary to implement by companies in
order to set the prices at a level through which sales revenue can be increase. In the
context of above Alpha limited company, this accounting system is applied for
fluctuating prices in accordance of marketing condition.
Benefit of different types of systems:
 Importance of cost accounting system- It allows by effective governance to prevent
unnecessary expenses from services and events. The overall operating cost of the above-
mentioned Alpha limited company is controlled by this accounting system which helps
them generate higher earnings.
 Importance of inventory management system - It advantages businesses in maintaining
stock costs lower in order to reduce overall costs. This accounting is used by the above
firm to assist their suppliers produce products according to market conditions.

 Importance of job order costing system - As mentioned above, it allows to calculate the
cost of each unit. Their finance department in Alpha limited company assess the cost of
produced components by considering the cost of each job. Importance of price optimisation system -Depending on this accounting system,
consumer rates are updated and calculated by user feedback (Ax and Greve, 2017). The
above-mentioned company's growth department uses important information about the
demand for their products and then control the price.
Integration of MAS and MA reports with business process.
The integration of MAS and MA reports is too crucial for companies. It is so because
each department of companies has a link with accounting system. For instance, in Alpha limited
company their various departments such as sales department, production department etc. are
linked to accounting systems. Similar as accounting systems, MA reports are also linked to their
business process.
Presenting financial information:
Fact to which data should be secure, up-to-date and accurate- It is critical that the features
listed below are information:
 Relevant - Financial information should be meaningful in compliance with the activities
of corporations. This is because bookkeepers are unable to generate detailed reports in the
lack of it.
 Up to date - Therefore, financial data must be up-to-date as the payments are carried out
frequently by businesses.
 Accurate - Financial information is required to be bug-free so that businesses can make
the right decisions on specific aspects.
 Understandable- For all users, particularly to managers, together with budgetary data, it
should be accessible so that they can plan innovative strategies.
MA reports:
 Inventory report- The report provides data on how much inventory is being bought,
marketed and used for production during a specific time period (Christ and Burritt,
2017). Along with this information, under this report total value of stock is updated on a

daily basis so that suitable action can be taken by managers. As well as this report is used
by production managers to assess key information about all forms of stock whether it is
finished good, raw material or any other. The bookkeepers of the above-mentioned Alpha
limited company prepare the document to control the storage costs and to make better use
of all materials.
 Performance report - This is a kind of document containing information on the actual
result and the expected outcome as well as variance among them. Depending on this,
administrators focus on worker and business entity growth. Eventually, in the absence of
this report it may become difficult to take decision about employees progress. This report
is being used in the above-mentioned company to manage the efficiency of each aspect.
 Account receivable ageing report- The document consists detailed information about the
debtors whose balance is due even after the agreed period. On the premise of this, the
Dept. of accountancy plans fund sources. This report records detailed information regards
to debtors in a systematic manner. Such as date on that transaction is done, rate of interest
if amount is not paid on time etc. This document helps to maintain debtors settlement
period shorter in the above-mentioned business.
 Budget report- It can be defined as a type of report which includes a detailed information
regards to estimated amount of income and expenses for a particular time period (Malina,
2017). By utilising key information through this report, it becomes easier for managers to
track the actual performance as well as in order to allocate monetary resources as
accordance of need of businesses. Such as in the context of above Alpha limited
company, this report is being prepared by their accountants with an aim of managing
their total amount of income and expenses in an effective manner.
TASK 2
Cost – This can be defined as those expenditures which occur in the process of manufacturing or
providing any service. Each business entity has a common objective of reducing total amount of
cost lower as much as possible. There are different types of costs such as direct cost, indirect
cost, fixed cost, variable cost and many more.
Cost analysis- This can be defined as a process of assessing total amount of expenses which have
been incurred in the process of completing different number of activities and operations.

Flexible budgeting- This is a type of budgeting which is associated to process of preparing
budget in which items can be fluctuated as accordance of variation in the sales and production. It
is simple use because of feature of modification in budgeted items.
Cost variance- This is a process of comparing actual occurred cost with estimated cost. The
variance can be adverse or favourable (Bui and De Villiers, 2017). In the case when actual cost is
higher as compare to estimated cost then it will be adverse situation for company.
Absorption costing- This can be defined as a type of costing technique in that fixed and non
fixed costs are considered in a different approach. Such as fixed cost is assigned as cost of period
on the other hand, the variable cost is considered as cost of unit.
Marginal costing- It is a type of costing technique in which both fixed and variable costs are
considered as cost of unit. In other words, under this entire value of expenses are absorbed in
order to prepare income statements.
Fixed cost – It can be defined as type of cost that can not be effected in proportionate to variation
in volume of goods produced. Some example of fixed costs are rent, business cost and many
more.
Variable cost- It can be defined as type of cost that can be effected in proportionate to variation
in volume of goods produced (Azudin and Mansor, 2018). Some example of fixed costs are
labour cost, staff wages and many more.
Standard costing – This is a type of cost which is estimated by accountants in order to make
compare with actual cost.
Inventory cost – This is a type cost that is aligned to process of procurement, storage and
management of stock.
Problem 1.
(I) Income statement under absorption and marginal costing:
Absorption Costing Statement calculator
Unit Selling Price 8

Unit Cost (FC+VC) 5
Fixed Manufac Expenses 150
Non Manufacturing Exp 50
Budgeted Activity 75
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000]
[£'000
]
[£'000
]
[£'000
]
[£'000
]
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening inventory
Closing inventory 0 0 15 0 0 15
0 15 0 0 15 5
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000]
[£'000
]
[£'000
]
[£'000
]
[£'000
]
Sales 600 480 720 600 560 640
Opening inventory 0 0 75 0 0 75
Add: Variable Cost[Prod.] 375 375 375 375 425 350
Less: Closing Inventory 0 75 0 0 75 25
Marginal Cost of Sales 375 300 450 375 350 400
Gross Profit 225 180 270 225 210 240
Adjustment for Overheads 0 0 0 0 -20 10
Less:Non Manufac Cost 50 50 50 50 50 50
Net Profits 175 130 220 175 180 180

Marginal costing:
Marginal Costing Statement calculator
Unit Selling Price 8
Unit Variable Cost 3
Fixed Manufac Expenses 150
Non Manufacturing Exp 50
Budgeted Activity 75
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000]
[£'000
]
[£'000
]
[£'000
]
[£'000
]
Sales 75 60 90 75 70 80
Production 75 75 75 75 85 70
Opening inventory
Closing inventory 0 0 15 0 0 15
0 15 0 0 15 5
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000] [£'000]
[£'000
]
[£'000
]
[£'000
]
[£'000
]
Sales 600 480 720 600 560 640
Opening inventory 0 0 45 0 0 45
Add: Variable Cost[Prodn.] 225 225 225 225 255 210
Less: Closing Inventory 0 45 0 0 45 15
Marginal Cost of Sales 225 180 270 225 210 240

Contribution Margin 375 300 450 375 350 400
Less: Fixed Manufac Cost 150 150 150 150 150 150
Less:Non Manufac Cost 50 50 50 50 50 50
Net Profits 175 100 250 175 150 200
Reconciliation statements:
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000 ]
[£'000
]
[£'00
0 ]
[£'00
0 ]
[£'000
] [£'000 ]
Sales 75 60 90 75 70 80
Production 75 75 75 75 75 75
Opening inventory 0 0 15 0 0 15
Closing inventory 0 15 0 0 15 5
Period 04/19 05/19 06/19 07/19 08/19 09/19
[£'000 ]
[£'000
]
[£'00
0 ]
[£'00
0 ]
[£'000
] [£'000 ]
Net Profits under Absorption Costing 175 130 220 175 180 180
ADD : Fixed Overheads in opening 0 0 30 0 0 30
LESS: Fixed Overheads in closing 0 30 0 0 30 10
Net Profits under Marginal Costing 175 100 250 175 150 200

Problem 2a
1. Calculation of followings:
(A) BEP in units and revenues-
BEP (in units)= Fixed cost / contribution per unit
= 180000/ 12
= 15000 units
BEP (in revenues)= Fixed cost/ PV ratio
= 180000/ 30*100
= £600000
Working Note:
Contribution per unit- Selling price per unit- variable cost per unit
= 40-28
= 12
PV ratio= Contribution/ sales per unit*100
= 12/40*100
= 30%
(B) Contribution margin ratio
= 12/40*100
= 30%
2b If machine is installed:
After installation of the new machine
Contribution Margin Per Unit = 40-14 = 26 Per unit

Break even point in units =
(180000+236000)/
26
Ans. 16000
Break even point in Pounds = 40x16000
Ans. 640000
P/V Ratio = (Contribution Margin per unit/ Sales Price per
unit)*100 65
BEP from P/V Ratio 640000
2 c
Scenario 1. Machine is not installed:
Without installation
Sales £5,40,000.00
(-) variable cost -£3,78,000.00
Contribution £1,62,000.00
(-) Fixed cost -£1,80,000.00
BEP -£18,000.00

Current
Sales £6,00,000.00
(-) variable cost -£4,20,000.00
Contribution £1,80,000.00
(-) Fixed cost -£1,80,000.00
BEP £0.00
Scenario 2. If machine is installed:
After installation
Sales £8,00,000.00
(-) variable cost -£2,80,000.00
Contribution £5,20,000.00
(-) Fixed cost -£4,16,000.00
Profit £1,04,000.00
Installed
Sales £6,40,000.00
(-) variable cost -£2,24,000.00
Contribution £4,16,000.00
(-) Fixed cost -£4,16,000.00
BEP £0.00
Accounting techniques to produce financial statements.
There are vital range of techniques in order to prepare financial statements. In the context
of this project report, two techniques are used for preparing income statements which are

absorption and marginal costing. Apart from the above techniques, there are some other
techniques which are used such as standard costing, activity based costing and many more.
Interpretation – As accordance of above calculation this can be find out that there is variation in
net profits from both absorption and marginal costing. In the absorption costing method, the net
profit is of 175000, 130000, 220000, 175000, 140000 and 200000 for month of April, May,
June, July, August and September. On the other hand in marginal costing, the net profit is
different which is of 175000, 100000, 250000, 175000, 150000 and 200000 for similar time
period.
TASK 3
Different type of planning tools with pros and cons used in budgetary control process
Budgeting: Anticipation of upcoming revenues and expenditure for organisation is
considering as budgeting. It is considered as a forecasting process of future revenues and
expenditures. Forecasting of financial budgets provides an estimation of required financial
resources to meet the objective of business.
Budgetary control: this is one of the process that provide results by comparing actual
results with budgeted figures (Collis and Hussey, 2017). A standard measure is formed by
organisations in subject to use the financial resources in optimum manner. The results help in
ascertaining the differences between the actual and budgeted cost figures. If the outcomes remain
high than budgeted figures than possible solutions for controlling the cost adopted.
Type of budgets
Capital budget: The budget that presents information about capital receipts and
expenditures are recognised as capital budget. There is type of capital receipts received by
entities as loan form government bonds, treasuries and loans granted by other parties. All these
are considered in capital budget.
Advantages: this is one of the effective budget that helps to ascertain the associated risk
and its impact upon future business projects. Decision making subject to particular capital receipt
or investment become more easy with capital budget.
Disadvantages: the decisions mainly related to long term nature and if the projection
doesn’t remain assessable to present actual results than it may lead organisation towards heavy
losses.

Operating budget: the budget presents data about how much financial resources were
budgeted and how much actual financial sources utilised for operating a business (Malmi, 2016).
Operating budget is prepared to assess the short term financial required and forecasting the
process in near future by analysing the revenues and expenditures for operating the business in
effective manner.
Advantages: operating budget provides a vast feasibility of revenue forecast for a
particular accounting period. the sales records are effectively presented in operating budget.
Disadvantages: the process of making the operating budget remain quite complex
compared to other budgets. It is difficult to find out capital and operating nature of expenditures
and revenues for businesses.
Pricing strategies
One of the big strategies is sustainable marketing. Some methods involve price-plus
pricing, in which a fixed margin is applied to a consumer's total cost such as materials labour and
overhead. Pricing is where the market cost of an item is applied to a ratio.
Supply and demand consideration
Throughout economics, supply and demand is linked to the quantity of a commodity
which manufacturers want to sell at different prices as well as the quantity that buyers want to
purchase (Wagenhofer, 2016). A commodity's price is determined by a market's interaction
between supply and demand. It is the primary framework used in theory of economics of price
determination. The consequent price is alluded to as the price for alignment and reflects an
arrangement between good's consumers and producers. The volume of a good supplied by
suppliers in equilibrium is equal to the quantity that consumers demand.

The amount of a product needed depends on that currency's price and likely on many
other variables, including other commodities prices, consumer incomes and desires, and
environmental effects.
Planning tools to prepare budgets.
The planning tools of budgetary control are too crucial for companies in the aspect of
forecasting and preparing budgets. For example the Alpha limited company is using various
budgeting techniques such as operating budget, capital budgets in order to make an accurate
forecasting of their budgets.
TASK 4
Distinguish among organisations that how adapting MA systems helps in resolving financial
issues
Financial problems are often recognised as a financial challenge that create complex
business situations and affect the financial performance of organisation down the position of
organisation among competitors (Rikhardsson and Yigitbasioglu, 2018). Type of financial
problems commonly found in organisations like shortage of financial resources in order to carry
out daily operations and management, cost of increasing debts, less profit margin, inventory
mismanagement, challenges in setting the selling price of products and services and much more.

These financial challenges directly and indirectly affect the financial performance and reduce the
productivity and efficiency for successful running position of business. The aid in order to
overcome these financial challenges are managed with effective financial governance and
implementing the management accounting system.
Financial governance
Financial governance is mainly recognised as a control and appropriate management of
available financial resources in business. An effective financial governance leads business from
downfall to sustainable growth and development (Järvenpää and Länsiluoto, 2016). It is one of
the contentious subject in various board meetings. It plays a vital role during the financial crisis
and in hard time of industries. During the circumstances of financial crisis and challenges
organisation form a corporate governance structure to resolve the financial challenges and issues
for subsequent period. after forming the financial governance structure the organisation be able
to contradict the financial challenges in financial opportunities.
Benchmarking: It is one of the key strategy that helps in strategic management and
organisational process for smooth functioning of business operations. this is an internal approach
in which organisation set its own standards by considering the base of past wonderful
achievements. This is one of the cost effective and practical approach in which organisation
would not have to put efforts on further data because required data remain exist with
organisation for strategic planning. By assessing the gaps after comparing the gap between the
financial performance entity be able to identify associate financial challenges and take
appropriate steps to resolve them.
Key performance indicators: A Key Performance Indicator is a tangible quality that
indicates how successfully a business meets key business goals. Institutions use multi-level KPIs
to measure their achievement of goals (Järvinen, 2016). High-level KPIs can concentrate on the
general business quality, while low-level KPIs can concentrate on departmental processes
including sales, merchandising, HR, endorse, and many others. There are two type of KPI’s an
organisation uses as financial KPI and Non-financial KPI.
Balance score card: This introduces to the measurement system which can be used by an
organisation to monitor and improve performance within the customer, financial, internal
business process, and growth segments of an organisation. In addition to this, balance scorecard
refers to the strategic management performance metric which is applied to find out and enhance

different internal business functions as well as their resulting external outcomes. This system is
used to measure and give feedback to companies. In this system, data collection is essential to
give quantitative information as executives and managers collect and interpret the data and use it
to make accurate decisions for the company.
Comparison of Organisation to resolve the financial issues
TESCO Sainsbury’s
Financial problem The company deals in grocery and
daily usable customer products as
food, clothing and home
appliances. The main financial
challenge of Tesco occurred in
year 2014. Organisation faced a
loss of 3.7 billion pound purchase
of Booker that reduced
profitability for the year.
It is one of the largest retail chain
across the world. Company also
deals in consumer goods and
services. The company faced a huge
displacement of employees during
the economic changes in the UK.
There were thousands of jobs cut
recorded in UK retail industry that
lead organisation towards less profit
and high labour turnover.
Identification of
financial problem
Financial experts analysed the
financial challenges by
implementing the benchmarking
tool.
With critical evaluation of the give
financial challenge in organisational
context, the management be able to
detect the financial problem after
applying non-financial KPI.
Application of
management
accounting system
Balance scorecard accounting
system is implemented in
organisation subject to manage
the accounting system in
organisation and set an accounting
line to manage the operations in
more effective manner.
Managers of Sainsbury’s
implemented the activity based
costing and assign the professional
workers to specified product line. By
this action the productivity increased
and cost of operations get decreased.
Accounting systems to solve financial issues.

In order to figure out the monetary issues, MAS contribution is too wider. There are a
vital range of accounting that have integration with companies departments (Chiwamit and
Scapens, 2017). As a result it becomes easier for companies to sort out the issues in an effective
manner. Like in the above Alpha limited company, they use different accounting systems named
as cost accounting system, stock management system etc.
CONCLUSION
The above evaluation presents a clear understanding of management accounting system in
organisational context. the above context it is effectively cited that management accounting
system plays vital role in decision making and strategic planning of business. The use of various
reporting methods presents a manner to present the managerial information in determined format
so that organisers be able to conclude the performance of business in practical manner. The
capital budgets and operating budget helps in determining the business needs for better financial
forecast and relating the business objective in more strategic manner. By comparing the
organisations that how management accounting system help in managing the financial challenges
effectively clearly defined and correlated with business aims.
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