Management Accounting: Types, Systems, and Planning Tools

This document provides an overview of management accounting, including its definition and different types of management accounting systems. It also discusses the benefits of integrating management accounting systems with reporting and explores various planning tools used in the field. The document includes examples and calculations related to marginal costing and absorption costing. Additionally, it explains different types of planning tools, such as budgetary tools, strategic planning tools, and pricing strategies.

Management Accounting
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Contents
INTRODUCTION...........................................................................................................................3
TASK1.............................................................................................................................................3
Explanation of management accounting and different types of management accounting system
......................................................................................................................................................3
Benefits of management accounting system................................................................................3
Different types of management accounting reporting..................................................................3
Importance of integration of management accounting system with reporting.............................3
TASK2.............................................................................................................................................3
Calculation of marginal costing...................................................................................................3
Calculation of absorption costing................................................................................................3
TASK3.............................................................................................................................................3
Explanation of different types of planning tools with their advantage and disadvantages..........3
Uses of different planning tools and their application for forecasting budget.............................3
TASK4.............................................................................................................................................4
Financial problem and use of management accounting planning tools to solve the problem.. . .4
Compare how organizations are adapting management accounting systems to respond to
financial problems........................................................................................................................4
CONCLUSION................................................................................................................................4
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INTRODUCTION
Business organization is established for run successful business in economy. For this
purpose, they use management accounting. It is defining as special branch of accounting. It is
concerned with analyzing, collecting recording and representing accounting data in a systematic
way which id manager to take decision for the organization. To understand this concept, ABC
Limited has been taken which is medium size organization. This report is prepared to define the
types of management accounting system and reporting system use to integrated organization
function. How manger s calcite profit with the use of marginal and absorption costing method
and planning tools used in formation of budget and forecasting of future business activities. This
report also concerns with how financial problem effect the organization and use of management
accounting tools to solve this problem in effect way.
TASK1
Explanation of management accounting and different types of management accounting system
Management accounting: This word is mixture if 2 different word management and
accounting. The term management define as the art of things done by other people and
organizing all the business activities in systematic. On the other side accounting is recording of
business transaction. Management accounting is branch of accounting in which all the
transaction record in systematic format which helps in taking decision. It also known as
managing or managerial business accounting (Ball Grubnic and Birchall, 2014). It plays major
role for medium size organization. Following are the types of managerial accounting system
which the ABC Limited can be apply
Job process system: This system is essential with the use of job system organization will be
understand the cost required in manufacturing of each product they identify the number of order
and the time required for delivering order to customers. With the use of job costing system ABC
Limited can record their customers order.
Cost management system: The most effect system of managerial account is cost management
system. IN management accounting various methods of costing are used through which the cost
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of manufacturing product and value of profit identify. Standard costing, marginal, job process
costing are part of this system. All have different method to calculate cost it depend on the
organization which method they follow to evaluate cost.
Inventory management system: In this system stock valuation has been done. For this various
types of stock management tools have been used. EOQ, JIT, ABC analysis and total quality
management tools these are usefully recording stock level. With the use of inventory
management system managers can identify the minimum, maximum and dangers level of stock
through which they can control the storing cost of inventory.
Price optimization system: This is most effective system. Implementing of this system help in
generating of profit. There are various types of pricing strategies, price skimming, price
penetration, price discounting all these are determining the price of product. It helps in overcome
the cost value and earn profit by selling price a higher rate. ABC Limited applies price skimming
method for their organization (Landherr, 2017).
Benefits of management accounting system
Following are the benefits of different type of management accounting system
Particular Management accounting system’s benefits
Job costing system ABC Limited use this method to identify the
number of order they get by their customers.
Record all the systematic
transaction .calculate the cost incurred on job
ordering of each product.
Cost management system Management department of ABC Limited use
cost management system to identify cost
value of each business activity with the help
of this they identify which activity require
higher amount of investment and then
formulate policies to reduce their cost.
Inventory management system This system is helpful in controlling
management cost of stock by systematically
manage inventory and reduce wastage
activities
Price optimization system With the use of this system, management
department of ABC Limited decide their
pricing rate of product on the basis of that
they earn profit and satisfied their customers.
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Different types of management accounting reporting
Management accounting report is formulated in order to track all the record of business
activities in systematic way which helps in future functioning procedures. Following are the
types of reports prepared by ABC Limited
Account receivables report: This report is formulated on the basis of collection information
regarding debtors. Account receivable report contains information regarding credit sales and
those debtors which are not paid their purchase amount to the organization. It helps in identify
non-performing assets of the debtor. On the basis of it management department formulate
policies to account received through which they target their amount as soon as police and
increase cash sales by offering attractive offers to debtors.
Budgetary report: This reports combinations of all the reports, it includes the data through
which future income and expenditure. This report is also helpful in taking decision as it is the
summery of all the reports.
Inventory management report: It is most useful report it is based on the data collected by stock
management system. This report is defining the minimum, maximum ad dangers level of each
stock. This report also concerns with h the cost required in maintain stock.
Performance report: It is prepared to analysis the performance of every department and their
employers. This report is summarized all the work and target archived by the employers. On the
basis of performance report ABC Limited managers takes decision regarding incentive,
promotion and give promotional and reorganizations on the basis of evaluate performance report
(Burn and et.al. 2015).
Importance of integration of management accounting system with reporting.
Management accounting system and reports play essential role in the process of
managerial accounting. The accounting reports are prepared on the basis of data collect by
management accounting system. Performance report and budget, stock are prepared by analysis
the cost incurred an debit and credit balance of the organization. Theses report help in taking
future decision and various system are used to control the risk of future uncertainties in ABC
Limited. As this organization is wants to expand their business and by using theses system and
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report manger can enhance performance as well as generate gain by effective use of pricing
strategies.
TASK2
Calculation of marginal costing
Marginal costing: This is one of the most useful methods of identifying cost of the
business accounting activities. It in marginal costing only variable cost consider for determine
the profit an effete of changing in units from the profit ((Haddadzade, Razfar and Zarandi,
2014).
Calculation of absorption costing
In this method of costing all the essential elements are calculating ad concern for
determine cost and indenting value of profit. It is useful in manufacturing uses organization
where cost of each product cans calcite easily.
Standard costing: In this method of costing difference between actual cost and standard cost
had been calculated and on the basis of theses the reason of variation has been identify and
organization change policies to reduce the variation. They use material, labor and overhead
variance through which they can determine budget and actual cost differences.
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Absorption Costing:
Budgeted Statement of Profit or Loss-January 2020.
Per Unit Total
£ £ £ £
Sales 50 800,000
Cost of Production:
Direct Material 10 180,000
Direct Labor 20 360,000
Variable Overhead 5 90,000
Fixed Overhead 5 90,000
40 720,000
+Opening Inventory 0
-Closing Inventory 80,000
Cost of Sales -Standard 40 640,000
Standard Profit 10 160,000
Adjustment for under-absorption -10,000
Budgeted Profit 150,000
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Absorption Costing:
Actual Statement of Profit or Loss-January 2020.
Per Unit Total
£ £ £ £
Sales 50 800,000
Cost of Production:
Direct Material 10 190,000
Direct Labor 20 380,000
Variable Overhead 5 95,000
Fixed Overhead 5 95,000
40 760,000
+Opening Inventory 0
-Closing Inventory 120,000
Cost of Sales -Standard 40 640,000
Standard Profit 10 160,000
Adjustment for under-absorption -5,000
Actual Profit 155,000
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Variable Costing:
Budgeted Statement of Profit or Loss-January 2020.
Per Unit Total
£
£
£ £
Sales 50 800,000
Cost of Production:
Direct Material 10 180,000
Direct Labour 20 360,000
Variable Overhead 5 90,000
35 630,000
+Opening Inventory 0
-Closing Inventory 70,000
Variable Cost of Sales 35 560,000
Contribution 15 240,000
Fixed Overhead -100,000
Budgeted Profit 140,000
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Variable Costing:
Actual Statement of Profit or Loss-January 2020.
Per Unit Total
£
£
£ £
Sales 50 800,000
Cost of Production:
Direct Material 10 190,000
Direct Labor 20 380,000
Variable Overhead 5 95,000
35 665,000
+Opening Inventory 0
-Closing Inventory 105,000
Variable Cost of Sales 35 560,000
Contribution 15 240,000
Fixed Overhead -100,000
Actual Profit 140,000
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TASK3
Explanation of different types of planning tools with their advantage and disadvantages
Planning tools: Theses tools in Managerial accounting are used by manager in order to
play for forecasting for this they use following tools
Budgetary tools: Budget is a statement which is show numerical data through which manager
identify future income and expenditure. The procedure of preparing budget are known as
budgetary. There is various method though which manger prepared their budget each are
describe below
Activity based budgeting: In this method the budget is formulated by mange on the basis of
allocation of various resource by business activities. Following are the advantage and
disadvantage
Advantage
This method of budgeting help in giving accurate information
Activity based budgeting method are useful in proper allocation of resource of ABC Limited
organization.
Disadvantage:
It is complex process
For allocation of resource personal with higher skills are required to formulate budget.
Rolling budget: In this type of budgeting method the budget is prepared for short time period.
Manager affect completion of first period of budget formulate a new budget on the basis of
antialiasing past activities (Miller and Hokenstad, , 2014).
Advantage
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This method of budget useful in reducing errors.
Rolling budget are providing flexibility to the organization.
Disadvantage
Employers get confuses due to changes of policies they get de motivated as they cannot adopt
flexible policies easily.
It required time to prepare budget for continues basis.
Zero base budgeting: This is one of the most popular method of planning tool. In zero base
budgeting method, budge pare reaper by manger on the basis of starting level. They formulate
budget from base kevel they did not take any previous year data.
Advantage
Zero base budgets are useful for newly establish organization.
This budget is providing accurate and reliable information regarding future business activities.
Disadvantage
This method is not reliable for organization which have minimum budget as it requires huge cost
for starting from new level.
Zero based budgets are time taking procedure.
Strategies planning tool: Theses tools are part of planning. Managers use strategic planning tool
to identity future possibilities and then take decision. IT considered SWOT and PESTLE analysis
tools. Theses environment scanning technique are help in planning for future business activities.
Advantage
With the use of SWOT and PESTLE manager determine the effect of internal as well as external
factors
They formulate policies related to reduce risk and grab opportunity by identifying strength,
weakness of the ABC Limited.
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Disadvantage
It requires time for sac the environment and market conditions.
It is compulsive procedure.
Pricing strategies: With the use of effect price strategies mange of ABC Limited able to
determine and take decision regarding their product’s price. Price skimming, penetration
discounting pricing on type of strategies. Managers of ABC Limited use price penetration
strategy for their product as the organization is in developing stage thus they take low price of
their product but when to reached at boom stage it raise the rate of prices (Eltaeib and Dichter,
2017).
Advantage
With the useful pricing strategy organization earn profit by take high margin on cost.
This method helps in decision making process.
Disadvantage
Taking decision regarding price require high skills people who have knowledge regarding
marketing condition.
The price is not rigid their value change with the factor of demand and supply
Cost planning tool: Various types of costing method are including in planning tool as with the
use of costing system manger take decision of planning of places to control cost at where the
organization incurred high cost as well as they reduce risk of uncertainty.
Advantage
With the use of standard costing ABC Limited identify the reason of variation of standard an
actual cost and formulate plan to reduce the variation.
This tool of planning help in formulating future policies to reduce risk.
Disadvantage
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IT is not essential that these systems proved accurate information
Accountant has been hiring who have skills and knowledge regarding all the adjustment and
accounting standard.
Uses of different planning tools and their application for forecasting budget
Different planning tools play vital role in forecasting of budget.
Manager of ABC Limited us activity based budgeting method through which they formulate
budget which help in taking decision and formulate future policies and also provide guiding for
organization (Paladi and Fenies, 2016).
Strategies planning tools are help in forecasting of future marketing condition on the basis of
these information manger formulate their budget as they have idea regarding which product give
sell get high rate in by eventuating market condition. ABC Limited use standard as well as
marginal costing method to determine their profit and evaluate cost it help in forecasting of cost
incurred in and build cost report of the organization.
The manager of ABC Limited also applies pricing strategies they use price penetration method
which help them to forecast their profit on the basis of identify the profit rat and forecast the %
of selling incurred in future. Thus all the planning tools help ABC Limited to planning effect
policies.
TASK4
Financial problem and use of management accounting planning tools to solve the problem.
Financial problem: At the present time it is not easy to establish an organization. And
run it successful in the hard competitive world. Special for small and medium size organization.
Financial problem is a situation under which organization is not able to any debt liability as well
as it is too hard for them fulfill availability of monetary resources for fulfilling current business
activities. Financial problem is a situation which is aeries due to lack of financial or monetary
resource. At the present time ABC Limited also face issue regarding financial problem the
organization is not to effectively run their business cycle due to this problem, Financial problem
arise in this organization because the sells rate is reducing and incurred management of stock is
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very high. But with the use of management accounting technique and tools the organization will
be able to overcome financial problem. But for that they need to implementing these tools in the
day to day business function.
Key performance indicator: It is the part of controlling process and performance measurement
procedure. With the use of this tool manager set indicator of perform the basis of that they
identify and recognize the performance of departments. KPI help in achieving goals in effect
way as employers are want to complete their work in within the given time period so that they
are able to go get bonus. With the use of KPI manager of ABC Limited solve their problem they
decided indicator for cost and department give the limit unit which they incurred cost to fulfill
their business task. It helps in controlling and as effectively completion of task at the given time
period. It also the problem of high cost incurred and require on maintaining stock of the ABC
Limited (Pérez-Fortes, Schöneberger Boulamanti and Tzimas, 2016).
Benchmarking: This tool of Managerial accounting is also useful in controlling the financial
problem. Just like KPI the organization set benchmark which is decide on the basis of rival
organization performance past performance of the company. The employers work to fulfill
benchmark target. It helps ABC Limited to set sales target and statement work on fulfill the
benchmark so that they archive the bonus and incentive which organization give them on the
basis of their performed. With the fulfilling of benchmark target the ABC Limited easily cover
up problem of related to financial and enhance their cash inflow activities.
Financial governance: This policy is used by organization to track all the business activities
running Business Corporation. Financial governance are the policies and recorder which define
the company work in systematic and ethical manner. It helps in reducing the risk of conflicts or
political issue aeries within the organization and employer are not engaged in illegal business
activities all the accounts are recorded in legal a systematic manner which help ABC Limited to
smoothly run their organization in ethical manner.
Compare how organizations are adapting management accounting systems to respond to
financial problems
Financial problem is biggest issue for the ABC Limited to overcome the use tool and
system of managerial accounting.
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Particular ABC Limited XYZ Limited
Issue of problem The organization
suffers from financial
problem as there cost
incur on stock maintain
activities is high.
This organization face the
financial problem because
of decreeing rate of sales
Management accounting system For solving the issue
manager of ABC
Limited apply
inventory management
system .With the use of
this system they track
the inventory record in
systematic way and
control and managing
of stock by applying
effective tool of
inventory control.
They use pricing
optimization system of
management accounting.
With the use of this system
they decided effect price
policy which attract
customer to buy their
product and increase level
of sales (Cavalcant and
et.al. 2016).
Management accounting technique The organization use
key performance
indicator tool through
which they can control
their cost and increase
cash inflow business
activities to overcome
financial problem
The firm use benchmarking
to set sales target and raise
their rate of sells well as
profitability to overcome
financial problem.
CONCLUSION
This report states that business organization apply managerial accounting in their day to
day business so that they can effectively attain goal and object of their organization. With the use
of inventory, cost system manager s identifies cost incurred during the production, and selling of
product it also determines the price of product. They also prepared budgetary and account
receivable report through which thy identify their future outcomes. Business organizations apply
cost technique though which they recognized their value of cost all these data ad tools of
planning useful in formulation of budget which define income and expenditure of future business
activities and provide guideline .Medium size organization suffers from financial problem due to
lack of cost inflow activities action to overcome these problem they use KPI and benchmarking
and system of management accounting through which they resolve the problem arise due to lack
of financial resources.
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