Management Accounting System and Its Application: Assignment (Doc)

MANAGEMENT
ACCOUNTING SYSTEM
AND ITS APPLICATION

INTRODUCTION
Management accounting is a special accounting branch which is used by different
companies in order to take decisions based on the accounting information to enhance the
efficiency and productivity of company and management of firm (Maas, Schaltegger and
Crutzen, 2016). The present report is based on company KEF Ltd is of manufacturing sector &
is of medium scale of business.
The report will start by covering the different types of management accounting system in
practice. Next it will discuss some of the various types of management accounting reporting
helpful for the companies in recording information and relevant data. After that it will highlight
some advantages of management accounting with their integration along with reporting of
management accounting. Moreover, the report will demonstrate advantages and disadvantages of
different planning tools along with their use and application within the company. At last the
report will discuss the use of management accounting system in solving financial problems along
with analysis that how management accounting leads company towards growth and success.
TASK 1
Management accounting and types of management accounting system
The management accounting refer to a series of steps which assist the management of
companies with intention of taking decisions with the assistance of analysis of the financial
statements and accounting information in order to manage the working and operations of the
company. Management accounting system is a system which aids the company in improving the
overall productivity of the company to attain higher profitability which will result in increase in
market share of the company. The different types of management accounting system is used by
KEF Ltd is discussed in the adjoining points below-
Cost accounting system- this type of system is used by KEF Ltd in order to estimate the
cost of product to analyse profitability, control of inventory and cost valuation. This accounting
system records all types of cost whether direct or indirect and records all the cost since the raw
materials are bought and it passes through different stages of production and till it turns into
finished goods (Cooper, Ezzamel and Qu, 2017). The system of cost accounting also helps
company in determining the cost of various different departments operating in KEF Ltd. the
major components of cost accounting are direct and indirect material, direct and indirect
overhead, labour.

Inventory management system- the inventory refers to as the stock of the company. This
type of system helps KEF Ltd in tracking the stocks available and needed, sales, deliveries and
many more related item. This system aid to companies in decisive the requirement of stock and
when it needs to be reordered without any delay is done by inventory management system. This
system provides aid in managing chain of supply and also helps in placing order on time before
the inventory reaches zero level (Nielsen, Mitchell and Nørreklit, 2015). The different types of
inventory management techniques are like LIFO, FIFO, ABC analysis, Weighted average
method, Just- in- time method and many more different type of similar methods.
Job costing system: The job costing method involves process of accumulation of
information relating to all the departments within the business. This is an effective and efficient
system that provides aid in predicting and analysing cost which is attached with job that is carry
out at production time. This method focuses on the accumulation all cost to per unit of the
production. Job costing provides aid to management of the company KEF Ltd to track expenses
and undertake proper record for the product.
Methods for management accounting reporting
Management accounting reporting is a system wherein all the data and relevant
information are recorded in form of report or crucial documents which outlines complete
working and operations of the business . These reports assist accountant of KEF Ltd in
measurement and evaluation of the performance of the company as all the data is recorded in the
various types of reports. The different management accounting reports used by KEF Ltd are
discussed in the following points-
Budget report - These reports are very important and necessary in management
accounting. This is because of the reason that it plays a critical part in measuring and evaluating
the performance of the company. This report helps the owner and management of KEF Ltd in
understanding the cost and the income sources and helps in controlling the cost so that the cost
can be decreased and income can be appreciated.
Performance report- these reports are created by KEF Ltd with intention of reviewing
the performance of the company and all the employees and staff at a particular point of time
(Chiwamit, Modell and Scapens, 2017). These performance reports are used by the managers and
accountants of KEF Ltd in taking the key strategic decisions. These reports also helps the

management in keeping control over the performance of the employees and taking measures to
improve their performance in order to increase the overall productivity of the company.
Account receivable report- it is a type of report used by KEF Ltd which outlines the total
amount which external parties owes to the company that it totals all the amount which is going to
be received by the company from outsiders and other stakeholders (Soderstrom, Soderstrom and
Stewart, 2017). If the report outlines that the amount is being collected at a slower pace then it is
not good for the company as it increases the debt risk for the business.
Cost report: it is kind of report which helps KEF Ltd. in distinguishing the cost relating
to all the financial activities conducted within the business. The cost report identifies and
decides the cost of each product, activity, services, processes and projects. This report helps
management in controlling the cost in an effective and efficient manner. Cost report also tries to
analyse and evaluate all the source of income and areas where expenses are incurred for a
particular activity which leads to higher profitability and growth and efficiency of the business.
Advantages of the system of management accounting and their application
The management accounting is very beneficial for KEF Ltd because it increases the
efficiency of the company and its employees as management accounting measures the actual
performance of all the departments and helps in comparing actual budgets and performance with
the standard performance. Also, this type of accounting helps in organizing, controlling and
coordinating different activities and departments of company and maintain harmony and
synchronization among all the activities within the business.
Management accounting Integration and reporting of management accounting
Management accounting is an activity or process which control all working and
operations of company and manage all the data and profit for make decision within the business.
On the other hand, management accounting reporting is a system wherein all the data and
information are recorded in form of report. All records are compared for taking decision and
making plan for short and long term (Coad, Jack and Kholeif, 2015). Management accounting
report and management accounting are integrated because both work hand in hand if one thing
gets wrong the other also goes wrong.
TASK 2
1.Production cost per unit – 46.67 / unit

2.Total cost of Production – 886730
3.Total cost of sales- 1026740
4.Calculation of Budgeted and Actual profit or loss for 19000 units
Budgeted Cost at 19000 unit Budgeted Profit or Loss for 19000 units
Material cost per unit Total cost Material
sales per
unit Total sales
Budgeted
Profit or
loss
19000 46.67 886730 19000 60 1140000 253270
actual Cost at 19000 unit Actual Profit or Loss for 19000 units
Material cost per unit Total cost
Material ( in
kg)
sales per
unit Total sales
Actual
Profit or
loss
19000 46.67 886730 19000 60 1140000 253270
Different types of costing that is Marginal costing & absorption costing
There are many different types of costing method which the company can use in order to
calculate the cost of production (Eldenburg, Krishnan and Krishnan, 2017). Some commonly
used costing methods are marginal costing and absorption costing.
Marginal costing- it is kind of costing technique in which the variable cost is charged to
unit of costing, on the other hand the fixed cost of the whole year is completely written off
against the contribution. It implies the additional cost that is incurred for producing an extra unit
of output.
Absorption costing- under this method all the cost involved into the manufacturing
process are assigned or allocated to the units produced. With variable cost and overheads it also
includes all the fixed cost and fixed manufacturing overheads.
Calculation of net profit or loss under marginal costing and absorption costing
Under marginal costing
Cost per unit
Direct Material 12

Direct Labour 20
Variable O/H 8
Marginal cost per unit 40
Selling price 60
-Marginal cost per unit -40
Contribution per unit 20
June
Sales (16000*60) 960000
Cost of sales:
Opening inventory 0
Material (19000*12) 228000
Labour (19000*20) 380000
Variable o/h (19000*8) 152000
760000
-Closing inventory (3000*40) -120000
-640000
320000
Contribution 320000
-Fixed costs -120000
Actual Net profit/(Net
Loss) 200000
Under Absorption Costing
Cost per unit
Direct Material 12
Direct Labour 20
Variable O/H 8

Fixed o/h 6
Total absorption cost
per unit 46
June
Sales (16000*60) 960000
Cost of sales:
Opening inventory 0
Material (19000*12) 228000
Labour (19000*20) 380000
Fixed Costs 120000
Variable o/h (19000*8) 152000
880000
-Closing inventory (3000*46) -138000
-742000
Gross Profit/Loss 218000
Actual Net profit/(Net
Loss) 218000
6. Interpretation and analysis of net profit or loss under marginal costing and absorption
costing
In the month of June company's profit under absorption cost is higher than the net profit
under marginal costing. It is because under absorption costing company charges fixed cost per
unit on the standard unit of 20000 units. The fixed cost per unit decreases because of increase in
the units because of which absorption cost per unit dropped down. Absorption costing uses
absorption cost per unit for the calculation of closing inventory because of which valuation also
decreased and this increased the profit of the firm
TASK 3
Pros and cons of tools of planning

The budgetary control can be explained as a process of deciding, comparing and
evaluating the actual results with the standard set by the company and their managers. Planning
tools refers to as different tools and instruments which are used by company in order to
implement any program or initiative within the business. The different types of planning tools
used by KEF Ltd are discussed in the connected points-
Operational budgets- these types of budgets are the budgets which represents the
operational process of KEF Ltd which helps the company to plan in advance the whole process
of operation that is from where to take raw material, how it will be processed and how the
finished goods will be distributed or supplied to the ultimate users and consumers (Horton and de
Araujo Wanderley, 2018).
Advantages
 By approximating the cost and expenses of the company the managers and accountant are
able to control the activities to decrease its expenses and increase the wealth of the
organization. Operating budget increases the accountability of the employees and staff and force them
to provide the faithful and correct data to understand the actual status and position of
KEF Ltd in market.
Disadvantages
 In operational budget manager has to measure and control the slack in the data which
ultimately delay the process and increases the unnecessary cost for the Super toughened
glass company.
Cash flow budget- This is a budget which is deciding or estimating the cash requirement and
how it will be generated and along with it the application of cash that is how it will be used for
different activities for future growth and development (McLaren, Appleyard and Mitchell, 2016).
In simple terms, cash flow budget means forecasting of the cash inflows and outflows within the
company.
Advantages
 It helps the company by avoidance of the unneeded debt liabilities and helps in planning
for safekeeping and maintaining the minimum cash level for meeting situations and
contingent liabilities which could occur in business.

 The cash budget also helps in knowing the financial health of the business.
Disadvantages
 The cash budget is totally based on estimates and that can be also wrong or may be
incorrect as every manager is different in way of thinking and perception and that is why
there may be difference in taking basis for estimation.
 The making of cash budget uses historical and past data and information for figuring the
future cash outflows and inflows which may not always facilitate correct and real
outcome (Carlsson - Wall, Kraus and Lind, 2015).
Use of various tools of planning and their application
There are different planning tools used by KEF Ltd. They use different planning tools
because these tools and techniques and budgets helps the company in allocating all the resources
in an optimal way. Some of the planning tools are as follows-
Financial budget : these budget are prepared in order to get the information about the upcoming
cash inflow and outflow and how to manage these expenses and prepare the plan for the
spending the amount different organization activity such as purchasing the raw material, wages
and salary, operating expenses etc. in the business organization (Lachmann, Trapp and Trapp,
2017). There are various types of financial budget like cash budget, capital expenditure budget,
balance sheet budget, etc.
TASK 4
Usage of system of management accounting in respond to financial problems
There are numerous techniques which is adopted by management accounting in different
organization to deal with financial problems. They are as follows :
Benchmarking - This is a process and a procedure of measuring and evaluating
performance of company in terms of employees, process, products and services with the standard
of company as the best in industry. This tool is effective for businesses as they provide a base for
comparison among actual performance with overall performance of industry.
Variance analysis - The variance analysis is a method which is applicable to compare as
well as evaluate the actual performance with actual results. The variance analysis is consisted of
comparison between standard and actual performance. Benchmarking is different from this

analysis as the standard performance is compared with actual performance under this technique.
These techniques enable managers of the company to overcome from financial crises by
formulating new plans and strategies for the variance observed by comparison.
Key performance indicator - The Key performance indicator evaluates every material
aspects of business that is growth, success, employees, etc. The Key performance indicator
mainly focuses on evaluation and measurement of overall success and growth of businesses. This
technique is applicable in management accounting which is used by managers of a company to
deal with financial problems within an organization (Alsharari, Dixon and Youssef, 2015). As it
facilitates a platform for development of strategies for future operation of organization.
Analysis of financial problem in management accounting
Benchmarking - The Benchmarking technique is adopted by KEF Limited as this method
enables an attribute of cooperation which helps the management personnel to deal with problems
of business. This technique helps the managers of KEF Limited to improve their performance
along with manufacturing process of business. The company KEF Limited is also gaining
sustainable success due to which this technique deals with root cause of the problem which affect
their financial stability and helps the company to survive for longer period (Mokhtar, Jusoh and
Zulkifli, 2016).
Variance analysis - The variance analysis technique is also adopted through the KEF
Limited. This helps the company to identify variations in actual results of organization in which
they need to execute corrections. By adopting of this technique company is able attain
sustainable success as the identification of variance helps the company to deal with them and
make correction as well as modification in problem areas accordingly.
Key performance indicator - The Key performance indicator helps an organization like
KEF Limited to deal with different aspect of business which provides an aid to company in
attaining goals and objectives. This improves the managers' ability in the company to enhance
their quality of decision making. This helps the company to manage sustainability in the
organization and maintain individuals working in it by managing their activities and aligning it.
Evaluation of tools of planning in order to respond to solving financial problems
The planning tools are the tools which aid the company in doing appropriate planning in
relation to all the accounts and data calculations of the business (Warren Jr, Moffitt, and Byrnes,

2015). The planning tools helps KEF Ltd in properly and before handedly to plan all the
activities that is from where the funds are to be raised, what cost will be attached with the
working and operation of the business, how that cost will be managed and raised.
CONCLUSION
With the thorough analysis of the whole assignment it can be concluded that management
accounting is an internal system within company wherein the managers uses accounting and
financial information as the basis of their decision- making and tries to develop plans, strategies
and policies which helps the company in solving problems and going in way of accomplishing
goals.
The report started with the meaning and various types of system of management
accounting such as cost accounting system, inventory management system and many more such
type of system. Next it discussed some various types of management accounting reporting which
includes budget report, performance report, account receivable report and many such types of
reports and documents. After that it outlined some advantages of management accounting with
the relation between management accounting and management accounting reporting.
Next it showed some calculations which is related to marginal and absorption costing.
Next it displayed some pros and cons of different tools of planning with their usage and
application like operational budget, financial budget and many other similar types of budget. At
last the report highlighted the use of management accounting in responding to financial
problems. This can be achieved with use of techniques like bench marking, variance analysis,
key performance indicators and many different types of technique.

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