M1 - Evaluation of various management accounting system

Management accounting

Contents
INTRODUCTION.....................................................................................................................................3
TASK 1....................................................................................................................................................4
P1: Management accounting and its different systems.....................................................................4
P2 Different method of management accounting reporting.............................................................5
M1: Evaluation of various management accounting system.............................................................7
D1 Management accounting system and management accounting reporting that are integrated
with the organisation process of company........................................................................................7
TASK 2....................................................................................................................................................8
P3: Cost accounting techniques to prepare an income statement....................................................8
M2: Management accounting techniques and financial reporting documents...............................11
D2. Financial reports which applies to interpret many business activities......................................11
TASK 3..................................................................................................................................................12
P4. Advantages and disadvantages of different types of planning tools used for budgetary control.
.........................................................................................................................................................12
M3. Usage of different planning tools for preparing and forecasting budgets................................13
TASK 4..................................................................................................................................................13
P5 Comparison of how organisation adopt management accounting system so as to respond to
financial problems...........................................................................................................................13
M4 Analysis of how in responding to financial problems management accounting can lead
organisations to sustainable success...............................................................................................15
D3 Various planning tools to resolve financial problems.................................................................16
CONCLUSION.......................................................................................................................................16
REFERENCES........................................................................................................................................17

INTRODUCTION
Management accounting refers to the managing and monitoring of financial transactions
recorded in financial statements such as profit and loss a/c, balance sheet, cash flow statement
etc. It is the responsibility of the accounting manager to keep records of every transactions so
as to present actual financial position of an organisation towards its stakeholders. It assist the
management of company to make an effective and suitable decisions in order to maintain
financial stability and rivalry position in competitive market (Management accounting and its
importance, 2019). The present assignment is based on LM Engineering Ltd. company which
deals in civil engineering and planning services to the people of northern British Columbia. It
was established in the country of UK. The present assignment explains the various
accounting and reporting systems along with their integrations in order to achieve
organisational objectives. The project also includes the different costing methods and
planning tools to control budget along with its merits and demerits. Role of management
accounting systems and various tools to resolve financial problems in order to attain financial
stability in competitive market (Garrison and et. al., 2010).
TASK 1
P1: Management accounting and its different systems
The term management accounting is the activity or whole process of recognising,
summarising, presenting and recording of different financial transaction that relate with in the
business. For record of this transaction various method or books are present such as profit &
loss account, cash and fund flow statement and balance sheet. The concept of management
accounting impact directly on various cost that are bear by company in upcoming future. It
help to increase cost efficiency and find different ways by which company operate activites in
cost effective way (Grabel, 2018).
Management accounting and its importance
LM Engineering ltd. Uses various types of accounting system that help company to
maintain their financial records. Along with this it also help management to make decision
with help to achieve company goals and targets. Several accounting system that are adopted
by LM engineering LTD. are as follow
Cost accounting system- Through this system company analysis cost of goods,
services, fixed and variable cost of company. This is essential part for every organisation like

LM Engineering Ltd. execute this accounting system to find out estimation cost of business
as it is beneficial because with company analysis their profit in future. So with cost
accounting system company sell their products in market with add their margin (Harris and
Mongiello, 2012).
Job costing system- The total cost of company is found with job costing system. LM
Engineering ltd. use this to predict or calculate the total cost that are bear by them to offere
their product or service in the market.It is most suitable for those companies that offer
product in wide range to company. With job costing LM Engineering ltd. predict the actual
cost of their different units. So in future this help company to find out the actual amount of
profits that are earn with specific unit.
Inventory management system- With the implement of inventory management system
it is easy to track the status of different inventories that are available in organisation. This
help a company to meet their products as expectation of customer with in a minimum time
period. LM engineering ltd. use this system to find out the actual number of products that are
present in company warehouse and store. Example- if an company want to track the number
of loans that are raised by company to complete its activities then they use this system
(Siverbo, 2014).
Comparison of management accounting with financial accounting:
Basics Management accounting Financial accounting
Meaning With this system company
analysis relevant and useful
detail about market and
company. It help to develop
effective plan and policy for
a business.
This system mainly focus to
prepare financial account for
a company such as profit and
loss account, trading account
etc. It help to ensure financial
position of company.
Time focuses Management accounting is
done for the future.
Financial accounting is a
base by which company
know their present and past
data.

Rules and regulation In this only internal rules and
regulation impact position of
business.
For this accounting company
have to follow proper
guidelines for a business.
P2 Different method of management accounting reporting
Management reporting system provide facility to management by which they identify
actual position of company in market. With this a company develop or create its policy by as
per the company goals and objective. This help organisation to increase future profits by
overcoming from future financial and modify their strategy so this not create barrier in
company process. In this both type of information is included that is monetary as well as non-
monetary. LM engineering ltd. prepare various types of report which help them to complete
their management accounting process.
Performance report- This report is prepared with the purpose of calculating the
performance of employees and organisation. This information always provide current and
update information of company and its employees. With this management find different issue
that reduce or harm current performance of company. As with help of this management of
LM Engineering ltd. prepare strategy and make corrective decision by which they resolve
issue and problem that are faced by employee’s and retain them in organisation for a longer
period.
Budget report- the budget help business to decide and allocate cost of different
department of company management. With this it is easy for company to calculate total
amount of funds that are required to complete different activities of organisation. Apart from
this the main motive for management to prepare budget is that they control resources and
save them from wastage.
Account receivable ageing reports- This report help LM engineering ltd. to find out
the debtors and creditor of the company. They affect on the profitability of company and
usually they are relate with credit transaction of company. With this financial department of
company found out different debtors whose balance are due so company collect them and pay
to creditors of company. It is also beneficial to develop policy by which company make
control their creditors and avoid bad debts situation.

Cost managerial accounting report- This report carry information about whole cost
that is invested by company or paid by company to execute their operation activities.With in
this case company implement tools by which they control and calculate price and expenses
that are bear by company before selling product and to calculate outcome that is received by
company after selling product to its customer. Such type of controlling help LM Engineering
Ltd to control unnecessary cost that are bear by company as it automatically increases profit
of the firm.
M1: Evaluation of various management accounting system
Several management accounting system have separate benefits if organisation uses
this for the purpose to accomplish their desired objective and goals. Some of the
management accounting system are mention as follow:
Advantage of cost accounting system
 This help management to evaluate and determine the cost by which company have to
pay extra cost in their business process. As it help to remove unessential cost and
make effective planning for future.
 With the analysis of cost accounting system company decide their price of product or
service that are charge by them by their clients. With this financial department of
company found actual cost that are invested by them to manufacture the product,
Advantage of inventory management system:
 LM engineering ltd. found the demand of its customer that are expected for future
and present. With this management meet the need of loyal customer easily by
delivering products to them on time.
 With this the inventory management and storage cost of company is reduce because
company is already aware about stock that is stored in surplus amount.
D1 Management accounting system and management accounting reporting that are integrated
with the organisation process of company
For the benefits of LM engineering Ltd. company develop integration between
management reporting and management accounting system as it is essential for company to
assist with this both management system. With this company develop and exist a plan by
which is effective to achieve organisational goal and objective. Example- Management has to
record daily transaction that are done in company such as exchange or sell of product with

customer. so this to find out position of customer it is necessary that company found
inventory position that is actually present in company stock. For further stock company sell
order necessary products that is required by company to manufacture products.
TASK 2
P3: Cost accounting techniques to prepare an income statement
Cost: It refers to the amount or value which is charged by an organisation from its
customers for the services and products they rendered to them in order to meet their needs
and requirements The cost accountant carefully analysis the total cost incurred in the process
starting from production and end with the final delivery to the customers (Nitzl, 2018). After
adding margin on total cost, an organisation set up the prices on their products and services.
There are two costing methods which can be used by LM Engineering Ltd. company in order
to calculate net profitability. Here are such costing methods:
Absorption costing: It is determined as an reliable costing method which provides
accurate cost incurred in the production and selling of products and services. It includes both
variable and fixed cost due to which it has other named i.e. full costing method (Absorption
costing, 2018).
Marginal costing; It is another and effective costing method which is used by small
and medium organisation as it help them in showing more profitability in their financial
statement which can easily attracts large number of shareholders. It can be due to inclusion
of variable cost only and ignore fixed cost.
LM Engineering Ltd. company have two such methods to calculate net profitability of
its business according to their mission and vision. Here are the calculation of net profitability
by using both costing methods:
Annex (A)
Budget 2019 2020 2021
Cost
Centre
Budgeted
production
overhead
costs in £)
Basis of
production
(overhead
absorption)
Cost
per
Hour Hours Cost Hours Cost Hours Cost
A 66000 22000 3 24200 72600 26620 79860 27500 82500

B 75000 15000 5 16500 82500 18150 90750 19500 97500
C 83600 41800 2 45980 91960 50578
10115
6 51500
10300
0
Annex (B)
(a) Labour hour: -
Product X = £6000*1 = £6000
Product Y = £8000*2 = £16000
Labour hour = £2,64,000
------------
22,000
= £12 per hour.
Overhead absorption on labour hour: -
X Y
Overhead absorption = 1*12 = 2*12
= 12 = 24
Total Overheads = £6000*12 = £8000*24
= £72,000 = £192,000
(b) Using ABC approach: -
Machine hour per period:
Product X = £6000*4 = £24,000
Product Y = £8000*2 = £16,000
Cost driven rate: -
Production set up = £179,000 = 2893 per set up.
60
Order handling = £30,000 = 416.666 = 417 per order
72
Machine cost = £55,000 = 1.375 per order

40,000
Overhead using ABC approach: -
X
Set up = 15*2983 = 44,745
Order = 12*417 = 5004
Machine cost = 24000*1.375 = 33,000
Total 82749
Y
Set up = 45*2983 = 134,235
Order = 60*417 = 25,020
Machine cost = 16000*1.375 = 22,000
Total 181,255
Annex (c)
Year X PV@ 12%
Dis Cash
Flow Y PV@ 12%
Dis Cash
Flow
0 -5000 -8000
1 2500 0.893 2232.143 1500 0.893 1339.286
2 1000 0.797 797.194 2000 0.797 1594.388
3 1000 0.712 711.780 2500 0.712 1779.451
4 500 0.636 317.759 1000 0.636 635.518
5 1500 0.567 851.140 1000 0.567 567.427
6 1000 0.507 506.631 2500 0.507 1266.578
Total 5416.647 7182.647

Payback Period = Initial Investment
Average Cash Flow
Project X = 5000 = 4
1250
*Average Cash Flow = 7500 = 1250
6
Project Y = 8000 = 4
1750
*Average Cash Flow = 10500 = 1750
6
NPV: -
Project X = Dis Cash Flow – Initial Investment
= 5416.647 – 5000
= £416.647
Project Y = Dis Cash Flow – Initial Investment
= 7182.647 – 8000
= - £817.353
M2: Management accounting techniques and financial reporting documents
The management accounting technique are beneficial to continue and prepare financial
reporting such as profit and loss ac and balance sheet, cash flow statement etc. LM
engineering ltd. identify their actual present position in term of finance by using different
tools and technique such as cost accounting system and financial statement analysis.
D2. Financial reports which applies to interpret many business activities
Each and every organisation need to record their financial report. In context of LM
engineering ltd. there are financial report and balance sheet in order to identify actual position
of company. This process is done by management by interpreting different transaction that

take place in organisation. With this it is easy for company to found that what actual cost are
invested by them to operate their business activity.
TASK 3
P4. Advantages and disadvantages of different types of planning tools used for budgetary
control.
Budget- This is used as internal tool for the company that help an organistaion to
calculate income and expenses for upcoming future year. A company divide their visions or
goals into minor task or goal such as monthly, quarterly and half yearly. With this
management evaluate the actual performance with expected performance of company.
Budget are developed for anything that include money, raw material and work force but
usually most of the budget relate with money performance. As it help to control expenses and
generate more income with in limit use of resources.
Types of budget- several types of budget that are generate by company are as follow:
Cash flow budget-This type of budget help a business to note that where the cash
come in and where it is paid out by the company. This help company to find out that whether
cash is managed properly and to collect surplus amount of profit by which company start new
project for their business. Like LM engineering LTD. help small company to maintain their
business.
Financial budget- This budget help company to maintain their monetary for whole
business. It include cash flow, fund flow etc. Company show their financial strength by
preparing their financial budget. LM engineering ltd prepare their financial budget which
help to attract more number of customer.
Budgetary control- This refer that how manager utilize budget for the whole financial
year. Like LM Engineering ltd help small industry to make financial budget and to develop
budget Tgwhich is need by company.
Contingency tool- This tool is used by company when negative situation is faced by
company. It help company to become already prepare to respond in a negative situation.
Contingency plan are always not negative but they have positive side also. Such as it help LN
engineering Ltd to maintain their business stable in difficult situation. Along with this
company also found that which is responsible for develop this difficult situation. As already

mention that contingency plan are not easy to create and it is also difficult to predict future
uncertainties.
Forecasting tool- This is most essential to make business strategy. Forecasting help to
predict sale and to develop new area with help of quantitative and qualitative data with the
support of past and present data.
 The advantage of forecasting tool is that they deliver relevant information by which
company secure their future. LM Engineering ltd. help companies to create budget n
future that is predicted with forecasting tool.
 Dis-advantage of forecasting tool that for business there are different scenario are
present that impact on organisation as they are dynamic so it is difficult to predict
them for future process. Sometimes their forecasted result also create loss for
company.
M3. Usage of different planning tools for preparing and forecasting budgets.
Planning tools help company to control unnecessary expenses that are not covered in
budget process. LM engineering ltd. use these tool to reduce cost of operation and complete
operational activities with allotted budget. Like forecasting tool help management to make
estimation about future expenses and to prepare budget to formulate future policy by control
this expenses.
TASK 4
P5 Comparison of how organisation adopt management accounting system so as to respond
to financial problems
Financial problems:
It is the restriction of company to achieve strong rivalry position and sustainability in
competitive market for longer period of time. For this, accounting manager gives maximum
efforts in helping an organisation not to face any financial loss which affects their existing
financial position in market. Instead of that, LM Engineering Ltd. company may faces
various financial issues due to several reasons which are determined as under:
Cash Flow problem: Such issues occurs when an organisation have insufficient cash
balances to pay its all debts and liabilities within due date. This may cause due to increment
in labour cost, unnecessary expenses in execution of business activities, generating profits

below expectations etc. LM Engineering Ltd. company may face such kind of financial losses
which badly affects their sustainability and interest of shareholders as well (Kaplan and
Atkinson, 2015).
Risk management: Fluctuations in different factors of business environment such as
political and economical, technological changes, interest rates on sources of funds etc. may
bring risk towards an organisation which can also damage their pre-planned decisions and
policies. This can also damage the financial stability of LM Engineering Ltd. which can be
resolve with the help of knowledge and skills attained by management.
Tools to resolve above mentioned financial issues:
Financial governance: It includes rules and regulations framed by the management
for the purpose of giving proper direction to their employees to perform according to the
company’s mission and objectives. This reduces the possibilities of errors and mistakes done
by the employees while recording business transactions which directly makes positive impact
in the improvement of financial stability of an organisation (Lukka and Vinnari, 2014).
Management accounting approach:
It is an approach which includes various effective financial resolving techniques such
as costing accounting system, Key performance Indicator, Benchmarking etc. These all help
in enhancing the performance level of both employees and organisation due to which it is
most preferable by LM Engineering Ltd. to adopt in order to resolve any financial issues
which negatively affect their profitability. Here are the brief description of such approaches
of management accounting:
Cost accounting and reporting system; It assist accounting manager to analyse the
actual total cost incurred in the production and distribution of final products to the market so
that the certain percentage of margin can be add on it. It restricts organisation to face any
kind of financial loss by assisting management to set an effective pricing policy which should
be charged from its targeted customers in exchange of providing products and services (Otley
and Emmanuel, 2013).
KPI: It is another effective tool which mainly focuses on enhancing the performance
level of employees by making comparison of their actual performance with standard

performance. It brings motivation among them to work hard and perform well so as to
achieve company’s expected profitability.
Benchmarking: It is a target which is set by the management after conducting proper
research on market trends, strategies adopted by their rivals, changing taste and preferences
of targeted customers etc. It drives the employees to perform according to the pre-determined
plans and strategies so as to achieve benchmark within given time frame. For this,
management of LM Engineering Ltd. should provide training and learning sessions for their
staff in order to increase their contribution towards goals and reducing wastage of resources.
This will help in bringing company ahead than their rivals in competitive market (Renz,
2016)
Comparison between L.M Engineering Ltd and Morgan Sindall Ltd. Ltd.
Basis of differences LM Engineering Ltd. Morgan Sindall Ltd.
Problem It is too difficult to analyse risk as
the business environment in complex
in nature which may fluctuated over
a time. Thus, it may failed the pre-
determined decisions and plans
framed by the management which
negatively affects the financial
position of business as well.
Cash flow problem may arises
within an organisation due to
having lack of knowledge and
skills of employees of
recording business transactions
in financial statements.
Approach To resolve above financial issue,
KPI and Benchmarking are two
method which will be more
profitable to adopt. Both these tools
increases the performance level of
employees by motivating them to
perform well without wasting of
resources.
Financial governance is better
to adopt as it gives proper
direction and guidance to the
management to bring out
maximum output from its
employees from the work
allotted to them.

M4 Analysis of how in responding to financial problems management accounting can lead
organisations to sustainable success.
LM Engineering Ltd. and its rival Morgan Sindall Ltd. uses different financial
resolving tools according to their financial issues occurred within an organisation. As in the
case of LM Engineering Ltd., risk management issues may likely to occur which can be
resolved using KPI and Benchmarking as it enhances the capabilities of employees to deal
with risk arises in business environment. On the other hand, Morgan Sindall Ltd. may face
cash flow problem issue which can be resolved by using Financial government that directs
the employees to perform in systematic way with proper utilisation of time and resources.
D3 Various planning tools to resolve financial problems
Flexible budget, forecasting tools etc. are some kind of planning tools which is useful to
adopt by LM Engineering Ltd. in order to resolve financial issues. For example, flexible
budget which allows management to make changes in their budget according to the situations
arises due to changing factors of business environment.
CONCLUSION
It has been summarised from the above assignment report that management accounting
makes easy for an organisation to maintain its strong financial position in rivalry market by
recording and analysing financial statements such as profit and loss a/c, balance sheet, cash
flow statement etc. For this accounting manager is held liable to adopt an effective
management accounting and reporting systems so as to make easy for management to make
suitable decisions and plans for the betterment of an organisation. There are different costing
methods which are also taken into consideration while calculating net profitability of
company according to their requirements and suitability.

REFERENCES
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Harris, P. and Mongiello, M., 2012. Accounting and Financial Management. Routledge.
Kaplan, R. S. and Atkinson, A. A., 2015. Advanced management accounting. PHI Learning.
Lukka, K. and Vinnari, E., 2014. Domain theory and method theory in management
accounting research. Accounting, Auditing & Accountability Journal. 27(8). pp.1308-
1338.
Nitzl, C., 2018. Management Accounting and Partial Least Squares-Structural Equation
Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control.
Springer.
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Siverbo, S., 2014. The implementation and use of benchmarking in local government: a case
study of the translation of a management accounting innovation. Financial
Accountability & Management, 30(2), pp.121-149.
Suomala, P. and Lyly-Yrjänäinen, J., 2012. Management accounting research in practice:
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Management accounting and its importance. 2019 [Online]. Available through:
https://www.invensis.net/blog/finance-and-accounting/what-is-management-
accounting-and-its-importance/
Absorption costing. 2018. [Online]. Available through:
<https://www.accountingtools.com/articles/what-is-absorption-costing.html>.