The Role of Management Accounting in Modern Firms

This assignment delves into the significance of management accounting in contemporary business environments. It emphasizes the utilization of diverse management accounting techniques to create accurate financial scenarios, facilitate strategic planning, and effectively address financial challenges. The document highlights the role of planning tools and various methods in optimizing organizational performance and achieving overarching objectives.

MANAGEMENT
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
P1.Overview of management accounting and essential requirements of different types of
management accounting systems...........................................................................................3
P2 Explain different methods for management accounting reporting....................................5
M1.application of various management accounting system to get desired advantages.........6
D1 Evaluation of how management accounting system and it's reporting integrated within
organization process...............................................................................................................6
TASK 2............................................................................................................................................7
P3. Calculation of costs and preparation of income statement:..............................................7
M2 application of range of accounting techniques for calculating profit............................10
D2 financial reporting of results get after implementing accounting techniques.................10
TASK 3 .........................................................................................................................................10
P4 Explain budgeting control and tool for controlling.........................................................10
M3 Analyse the use of different planning tools and their application for preparing and
forecasting budgets...............................................................................................................13
TASK 4..........................................................................................................................................13
P5. Ways in which organisations are adapting Management Accounting systems to respond to
financial problems................................................................................................................13
M4. Analysing how in responding to financial problems, management accounting can lead
organisations to sustainable success....................................................................................15
D3. Evaluation of how planning tools for accounting respond to solving financial problems16
CONCLUSION.............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Management Accounting refers to the process undertaken by financial managers of the
company to prepare management accounts and reports. This is done to provide statistical and
financial information that are accurate and necessary to take short term decisions of a company
(Kumarasiri and Jubb, 2016). It is generated on a weekly or monthly basis for company's internal
stakeholders like chief executive officers (CEO) and department managers unlike financial
accounting which helps external stakeholders determine the financial condition the company by
annual reports. The reports of management accounting include sales revenue generated, cash
availability, accounts payable states, raw materials, inventory, outstanding debts, etc.
The following assignment is based on Pavestone, one of the leading manufacturing
companies. It was founded in 1980 and undertakes manufacturing of segmental concrete
products to industrial, retail, contractor, residential and commercial businesses. The assessment
includes requirements of different types of management accounting systems, different methods
used for management accounting reporting, advantages and disadvantages of planning tools for
budgetary controls and how organisations are adapting management accounting systems to
respond to their financial problems.
TASK 1
P1.Overview of management accounting and essential requirements of different types of
management accounting systems
Management accounting is a detailed process of identification, interpretation, analysing
and presenting accounting information of a company which is acquired by cost and financial
accounting (Maskell, Baggaley and Grasso, 2016). It helps the managers of the firm to formulate
effective policies and enhance their decision-making process.
Difference between management and financial accounting:
There is a huge difference between management and financial accounting which are
discussed below:
 Users: Management accounting is an internal function and is implemented
internally with employees and managers of the firm whereas financial accounting
is the point of consideration for external users like shareholders, banks, creditors,
etc.

 Regulations: Management accounting does not consider external rules and
regulations and no application of accounting standards is imposed. Whereas,
various set of rules and regulations are imposed in financial accounting.
 Sources: Management accounting undertakes both financial and non-financial
data, whereas, only financial data is used in financial accounting.
Role of management accounting in an organisation
In Pavestone, management accounting plays a vital role which is described below:
 It improves communication within the organisation which leads to better decision-
making of the managers.
 The information produced by management accounting is relevant which helps the
managers to formulate effective policies.
 It helps the firm to exploit market opportunities by generating value through
critical analysis of information.
 Management accounting helps to build trust in the firm as it promotes ethical
practices within the organisation.
Different types of management accounting systems:
Organisations use various types of management accounting system which helps them to
conduct their managerial operations effectively (Pavlatos, 2015). Types of management
accounting system used in Pavestone and their requirements are described below:
 Job Costing System: This system includes the process of assembling information about
the costs used for a specific job. Such information helps in reimbursements of the cost in
order to submit it to a client under specific contracts (Schaltegger, Burritt and Petersen,
2017). This system is best suited when manufacturing goods are different from one
another. It helps the Pavestone managers to manage information and monitor and keep a
record of the cost required in each job. The cost flow in this system is mentioned below:
▪ The cost of direct materials, direct labours and manufacturing overheads is
determined.
▪ Job cost sheets are prepared to track inventory of Work In Progress.
▪ Inventory of finished goods is determined.
▪ Finally cost of goods sold is acquired.

 Cost accounting system: Managers of Pavestone use this system to estimate product
costs to conduct a critical analysis of company's inventory, cost control and profitability.
The methods used in the company is process and job costing. Inventory Management System: Management and supervision of non-capitalized assets
and stock of the firm is conducted by Inventory Management System. This system helps
Pavestone to attain effictive and efficient flow of inventories both in the firm as well as at
the time of sale. The firm applies this system to reduce inventory cost and enhance their
profitability. The method used by the firm is ABC analysis. Under this, the inventory is
divided into three categories- A: which denotes most valuable items, B: which denotes
moderately valuable items and lastly C: which denotes least valuable items. This system
helps the firm to categorize and manage its inventory according to priority of the
products.
 Price Optimisation System:This system determines the impact of price fluctuations on
the demand in the market (Smith, Brännström and Jansson, 2015). Pavestone uses this
technique to effectively evaluate their price rates and adjust this price according to the
demand which could help raise their profitability ratio. It helps Pavestone to decide the
price rate of multiple products at one time. It would help the firm to determine the
structures of initial, discount and promotional pricing.
P2 Explain different methods for management accounting reporting
Managerial accounting concentrates on internal financial data which is used in an
organization for various purposes such as evaluating manufacturing process (Trucco, 2015).
Accounting experts use this data in making budgeting plans and controlling. It includes standards
commercial statements, balance sheet, profit and loss report and so on. Here, narrating main
methods for accounting report in management:
Budget reports: It assist to top management in analysing internal as well as external
performance of an organization. Managers estimate a budget plan on the bases of current
expenses from period of years (Agrawal and Cooper, 2017). Pavestone should consider on this
accounting report technique to sustain their profitability. This principal helps in determining all
financial sources for expenses for further manufacturing procedures. A company tries to
attaining objectives and goals towards managing accounting reports.

Job cost reports: It shows expenditures which related to a particular project within a
firm. In this process, accounting expert estimates receiving revenue and profitability from
specific job. These additional efforts help in decreasing extra money during work by supporting
to high earning plans. By this report, Pavestone can easily determine complete cost which will
take place in future and current operational plans.
Inventory and manufacturing: This provides all relevant information about raw or
product stock. In respect of Pavestone, accounting manager should concern on these aspect
to ,maintain manufacturing procedures for increasing efficiency. This report indicates labour
cost, raw material wastages, and per headed cost at working station. Therefore, if operation
department does generate any related problem, manager can easily find out it along with proper
solutions.
Thus, these reports help in executing budgeting plans whether it is operational functions
or production activities. It provide better guidance in further financial planning by optimizing all
organizational resources (Christ and Burritt, 2017).
M1.application of various management accounting system to get desired advantages
System Benefits
Price Optimisation System It will help Pavestone in analysing behaviour of consumers
towards different price sets and also help them to identify best
price to achieve higher profitability.
Job Costing System Pavestone can determine many type of costs from production
process. It will help in reducing replication of work and assist in
analysing quality of work.
Inventory Management
System
Pavestone can increase efficiency of inventory with this system
and it will also help them in preserving both time and money.
D1 Evaluation of how management accounting system and it's reporting integrated within
organization process.
Management accounting report integrated within organisational process:
Types of reporting Evaluation

Budgeting Reports By this Pavestone can complete organizational activities in order
to achieve goals and objectives of business.
Job costing reports This will help Pavestone to accomplish goals related to cost and
assist in bring down the cost.
Inventory and
manufacturing
With the help of inventory management system Pavestone can
make attempts to manage the stock on timely manner and would
help in optimisation of resources.
TASK 2
P3. Calculation of costs and preparation of income statement:
Cost refers to the amount used in production of a product or a service. It also includes a
detailed monetary evaluation of resources, materials, risks, efforts and time consumed in the
production and delivery of that particular product and service. There are two types of costs
mainly which are described below: Fixed Costs: These costs represent those segments of cost that are constant for a certain
output level without fluctuating. However, with increase in production, the product's per
unit fixed cost decreases (Christopher, 2016).
 Variable costs: These costs are variable segments of cost that changes according to
variation in the production. These costs share a direct relationship with production. It
increases with increase in the level of output and vice versa. Labour and Raw material
costs can be perfect examples of variable costs.
Marginal Costing: This refers to the system where fixed cost are fully written off for the
period and only variable costs are accumulated. Cost per unit in marginal costing also remains
constant. In this system, volume of output is changed with variation in cost.
Absorption Costing: In this costing, all the costs incurred in the production are treated as
product cost. This costing focuses on all the expenses and resources used for production. Both
fixed and variable costs are taken into consideration for inventory valuation. Direct material
costs, direct labour costs, and overhead costs are included in this costing. However, with the
variable manufacturing costs, each unit accumulates a part of fixed overhead costs (D'Onza,
Greco and Allegrini, 2016).

For instance, Pavestone produces and sells a single product with selling price of £55. The
unit costs are described below:
COSTS AMOUNT
Direct Materials £7
Direct Labour £6
Variable Production Overhead £ 2
Variable Sales Overhead £1
Fixed costs for the month are given below
ACTUAL COST AMOUNT
Production overhead £3,200
Administration cost £1,200
Selling cost £1,500
The sales for a particular month are 600 units. The actual production was 800 units.
There is no opening stock. So, according to this scenario, the income statements as per marginal
and absorption costing are as follows:
Income statement as per marginal costing:
Net income = (sales revenue – marginal cost of goods sold) = (contribution – fixed cost)
Particulars Amount
Sales revenue = (no. of units sold x selling price of each = 600 x 55) £33000
Marginal Cost of products sold: £9600
Production = (units produced x marginal cost per unit = 800 x 16) 12800
closing stock = (closing stock units x marginal cost per unit = 200 x
16) 3200
Contribution £23400

Fixed cost ( 3200+1200+1500 ) £5900
Net profit £17500
Income statement as per absorption costing:
Net Incomes = (Sales revenue – Cost of goods sold) = (Gross profit – Selling and
Administrative expenses)
Particulars Amount
Sales = (selling price x no. of units sold = 55 x 600) £33000
Cost of goods sold = (total expenses per unit x actual sales = 23.375 x 600) £14025
Gross profit £18975
Selling & Administrative expenses = (variable sales overhead x actual sales +
selling and administrative cost = 1 x 600 + 2700) £3300
Net profit/ operating income £15675

M2 application of range of accounting techniques for calculating profit
In today's era, there is a number of techniques are accessible which assist to an enterprise
in collecting internal accurate information. By using such techniques Pavestone' managers can
enable for making reports to operating decision making process. Here, some major techniques
are explaining:
Standard Costing: Accounting mangers record all business transactions which assist to
analyzing the gap between actual cost and standard in Pavestone.
Marginal Costing: This technique helps in controlling cost and enhance profit level
within an organization.
D2 financial reporting of results get after implementing accounting techniques
From the above example, it can be interpreted that the per unit cost of firm's products can
be effectively calculated by using tools and techniques of management accounting. Marginal
costing takes only variable costs into consideration and fixed cost is written off to the
contribution, whereas absorption costing considers all the costs costs in calculation. Thus, as per
example, the net operating income as per marginal and absorption costing is £17500 and £15675
respectively for Pavestone.
TASK 3
P4 Explain budgeting control and tool for controlling
Budgeting control refers a process of determining actual income and expenses, so that
company can easily coordinate with their departments (Jack, 2015). It compares to earning plans
with the existing profitability for making changes in performance procedures. Throughout this
function experts act upon achieving outcomes within an organization. This system thoroughly
focuses with planning and controlling on selling commodities and production efforts. Pavestone
can acquire better relief in day to day process according to organizational objectives.
This process plays many significant roles in budgeting plans execution for improving
efficiencies. For Pavestone succession, it is essential to prepare and managing administrative
budgets to cope up with future challenges such as natural calamities. Sound accounting gives
adequate and reliable data for estimating future requirement in an enterprise. All employees'

participation should be involved in successful budgeting plans. Therefore, company need to
consider on budgeting planning tools as describing in below statements:
Forecasting planning: Forecasting refers to predicting an activity of the future by
analysing past and present activities (Definition of forecasting, 2018). This technique provides
proper assistance to predict future uncertain expenditures related to further activities. By using
this Pavestone company can analyse cash flow during manufacturing process which overcome to
shortage of money. Managers can easily identifies funding requirements and cost for extra
efforts which helps in strategic operational planning. Moreover, it has some disadvantages as
well as better advantages for executing business plan:
Advantages Disadvantages
It increases possibilities of accomplishing
Pavestone goals by reducing budgeting
problems.
Forecasting tool consumes sufficient or
sometimes extra time to anticipating related
prospects in Pavestone.
This process helps in making actual reports to
Pavestone's employees about how they are
performing towards objectives.
It conducts extra efforts for which all
employees may not be cooperate during high
work loads.
Contingency plans: This budgeting tool prepares for predicting future risks that can be
face by any organization. Throughout this assessment Pavestone's managers should create more
sophisticated plans to managing future uncertainty. It addresses to all critical operations along
with outline on reducing problems to an organisation. Moreover, this tool alert regarding to over
planning which cannot be execute or not in adequate manner. It also have many benefits as well
as drawbacks those are mentioning:
Advantages Disadvantages
By executing contingency planning, Pavestone
employees learn handling crises without
waiting for disaster.
For Pavestone, it can be typical to ensure all
employees participation during their
disagreement.
It helps in prevention from unnecessary loss in
production department to an organization.
Resulting errors are occur from outside
informations for Pavestone, for instance: legal,

media and vandalism.
Scenario planning: This preparation provides relevant information about economic
consequences, new competitors, impact on supply chain, cost structure and consumer buying
patterns in market. Experts are using this tool for analysing all these aspects to assess and
implementing in budgeting plans. In respect of Pavestone, managers should apply on this tact to
create ultimate versions for their enterprise budge. It allows to maximum profits through
transactions data so manager can easily generate accurate balance sheet.
Advantages Disadvantages
It allows to create and upgrade multiple
version for Pavestone enterprise by identifying
critical uncertainties.
It involves brainstorming and need to explore
different alternatives for future modifications
so Pavestone need to hire professionals.
Scenario tool supports to internal and outside
communication channel by following
organization limitation.
In dynamic market, it create critical situations
to predict a correct scenario for Pavestone.
Thus, budgeting plan can easily execute and controlled by company's superiors by
following above mention techniques. Moreover, company need to consider on costing
procedures for decision making programs over operational and other organizational process.
Here, explaining three relevant costing system which will be useful for Pavestone:
Normal costing: It applies for actual cost of a product or service for instance: this can be
related to cost of material, labour and allocation. In respect of Pavestone, managers use in the
derivation of product price to determine budgeting plan. It can measure through this formula:
normal costing= direct material cost+ labour cost+ allocation rate
Actual costing: It refers to simple method of determining an amount or estimate cost of a
product which is based on lobar and materials. These are the real cost and provide assistance in
inventory management. It includes related producing items such as factory rent, electricity and so
on.

Standard costing system: In this method, cost is predict by managers for advance
production under given organization terms and conditions. Pavestone can take benefits by using
standard tool to fulfil surplus demand in potential market.
Therefore, all those were most common costing system which helps in making budgeting plans
to Pavestone enterprise. Through these system managers can determine their product cost
according to different market situations and organisational conditions. Although company need
examine various cost activities which explaining here:
Job costing: This method is used where individual products are unique. Managers
records manufacturing cost in order to maintain operational data. Pavestone should apply on this
system for tracking all expenditures which helps in knowing taxation need.
Process costing: It accumulates material and worker costs along with aggregate
production expenses. Pavestone' managers can use for their large quantity of manufacturing
products in respect of mass production plans. Experts uses for
Batch costing: It is similar with job costing, under this batch includes number of goods
whose production cost cannot be isolate. In respect of Pavestone, managers should target by this
system for their building material products for instance brick, wood, cement and concrete.
Balanced scorecard: Experts is used this technique to making strategic planning in
management by following organizational objectives and vision. It improves many process such
as communication and feedback among employees.
M3 Analyse the use of different planning tools and their application for preparing and
forecasting budgets
As per above explantation, those planning tools gives different kind of profits in
budgeting plans. According to forecasting plan, Pavestone managers can observe all aspects of
monetary terms and conditions which direct helps in estimating exact plan. Secondly, it covers
through contingency plan that protect from uncertain circumstances. Another one highlights
market trends and competitor's strategies that guides for up-gradation within Pavestone.

TASK 4
P5. Ways in which organisations are adapting Management Accounting systems to respond to
financial problems
It is very necessary to use financial resources in an organisation to avoid under or over
utilisation which possible could add to the cost of the firm. Management Accounting can help the
managers to measure the performance of a firm based on the performance of financial tools and
resources of the company. But sometimes, when priorities are given to other major issues in the
firm, it indicates the rise of financial problems in the company (Joshi and Li, 2016). These
problems can be a reason for organisation's downfall and its underperformance in the market
which hinders is effectiveness and its position in the market.
There are two reasons because of which Pavestone suffered major financial problems.
These reasons are described below: Mismanagement: One of the key reason for rising of financial problems in any
organisation is mismanagement. It refers to under or over utilisation of financial
resources and results in inefficiency of the firm. In Pavestone, the responsibilities were
wrongly distributed within the organisation. Employees neglect the responsibilities
towards handling payments, taxes and bills which resulted in spread of misinformation
to the upper management and wrong financial outcomes. Moreover leaders didn't
effectively monitor the account practices and budgeting which increased these problems
within the firm.
 Expansion: Another severe issue which contributed in the increased financial problem
is business expansion. Pavestone planned a business expansion project and to attain its
objectives, brought expensive raw materials and technological equipments that
immediately put a heavy burden on the company's financial department. Expansion of
the company led to employment of new staff, buying up new premises, purchasing new
raw materials. Over-trading also became a big contributing factor towards these
financial problems arising in the organisation.
However, managers of Pavestone are using two effective techniques to eradicate these
financial issues. These techniques are described below: Key Performance Indicator (KPI): The company is currently using Key Performance
Indicator to measure the performance of the current expansion plan with the expansion

plan implemented in the past. How the previous managers successfully executed an
expansion plan can set a powerful base for the current managers and they can easily find
their shortcomings which are exerting the pressure on the company's financial resources.
Moreover, this would help the managers to effectively measure the performance of each
resource used in the expansion and how to effectively conduct the functioning of these
resources at their highest potential.
 Benchmarking: Pavestone is also using benchmarking as an effective technique to
measure its business performance by a thorough comparison of its business processes
with other competitive firms. Benchmarking would help the firm to determine the
required quality of the product, necessary time schedule and the most accurate cost
required to carry out these processes. The benchmarking is also used by the firm to
compare the performances of various product lines within the organisation. This would
help the firm in determining the reasons for underperformance of its units.
Comparison of Pavestone and Allen Block
PAVESTONE ALLEN BLOCK
This company uses KPI and Benchmarking as
effective tools to measure the performance of
the business processes.
Allen Block emphasises on using Comparative
Ratios and 360 degree feedback to measure
its business performance.
The advantage of using KPI is that the
company can critically evaluate the
performance of its resources and easily identify
the factors that are the causes of
underperformance of its business units
Comparative Ratios help Allen Block to
compare its performance against these ratios
and measure the outcome to determine its
performance with its competitive firms.
Benchmarking helps Pavestone internally as
well as externally. It helps the firm to measure
its performance with its competitors and also
compare the performance of its internal
business units. This in turn enables the firm to
formulate effective strategy to effectively
360 degree feedbacks help this company to
measure its performance by gathering
feedbacks from its stakeholders both internal
and external. These results are presented to the
employees of the firm and can be a
contributing factors towards implementing

achieve its business performance. effective training and development programs
for them.
M4. Analysing how in responding to financial problems, management accounting can lead
organisations to sustainable success.
It is very essential for organisations to implement management accounting to attain
sustainable success. It would help Pavestone to conduct their financial operations in a systematic
manner. It would help them produce financial reports appropriately, thus, making their overall
operations effective. In addition to this, it would help the firm formulate effective strategies to
enhance the overall performance of the business.
Analysis on how management accounting lead to sustainable success
Management accounting concept plays essential role in leading firm towards
sustainability. These is explanation which state this tactic use in Pavestone is stated below:
 This system is used by management to frame different plans for execution of business
activities in according to firm's objectives and goals. For this, manager and efforts of
subordinates are integrated for success of Pavestone.
 Management accounting system benefits firm in construction of different forms of reports
that are inventories, cost, budget and many other. Thus, business operations are
conducted in effective manner which result in attainment of business targets.
D3. Evaluation of how planning tools for accounting respond to solving financial problems
Planning tools can be very useful for organisations to solve their financial problems. It
would be very helpful for Pavestone if the firm implements these tools since the very beginning
of their financial activities. Tools like Benchmarking, KPI's and 360 feedback would allow the
firm a thorough look into their financial strengths and weaknesses. This would in the end help to
cut the unnecessary cost which would add to profitability of the company.
CONCLUSION
Thus we conclude by the above report that management accounting is very essential for
organisations to effectively manage their financial resources. Organisations are required to use
different types of management accounting systems as it is necessary to maximize the
performance of the firm. Different types of management accounting reporting help the firms to
determine the accurate financial scenarios of the company. A range of management accounting

techniques could help the organisations to develop accurate financial reporting documents.
Planning tools are a crucial aspect of management accounting practices and encourage the
managers to formulate flexible strategies for every situation that could affect working of the
company. Lastly, companies can use effective techniques to eradicate the inevitable financial
problems effectively and could easily achieve overall objectives of the organisation.