Management Accounting System and Its Application: Assignment

Management Accounting
System and Its Application.

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1 ...........................................................................................................................................1
Different types of management accounting system.....................................................................1
Different method used for management accounting reporting....................................................2
Benefits and application of management accounting in the organization...................................4
Evaluation of management accounting system and management accounting reporting.............4
TASK 2............................................................................................................................................5
Income statement by using marginal and absorption cost...........................................................5
TASK 3............................................................................................................................................8
Advantages and disadvantages of planning tools used for budgetary control.............................8
Application of planning tools in preparing and forecasting Budget..........................................10
TASK 4..........................................................................................................................................10
Adaption of Management Accounting system for resolving financial problems..........................10
Use of Planning tools in resolving financial problems..............................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting is used to measuring, analysing, evaluating and identifying the
information from the various accounting data and take the effective and efficient decision for the
organization to improve the performance and profitability of the organization. KEF limited
company is medium-sized manufacturing company. The report highlights the role of
management accounting the various department of the organization and the different types of
management accounting system. It focuses on the methods of management accounting reporting
and various ways to improve the performance of the organization. It also provides the range of
management accounting techniques to calculate the production and total cost of the organization.
The report also highlights the pros and cons of different types of planning tools for controlling
the budget of the organization. It evaluates the various ways to adopting management accounting
system and solve the financial problems of the organization.
TASK 1
Different types of management accounting system
Management accounting : Management accounting is the process of identifying, measuring,
analysing and interpreting information to the manager of the organization for achieving the goal.
Management accounting is also known as cost accounting. In other words management
accounting refers to transferring the data into the useful information for the mangers to take the
financial and management decisions (Management accounting, 2019.).
Requirement of different types of management accounting system
The aim of financial accounting system is to provide the information to the external users like
stakeholders, government, lenders etc. but on the other hand the aim of management accounting
is to provide the information to the internal users. The different types of management accounting
systems are cost accounting, inventory management system, job costing system etc.
Inventory management system
Inventory management system regulate the inventory in the organization. KEF Ltd. Company
use the inventory management system for specifying the shape and placement of goods in the
organization and order the goods from the manufacturing units on the demand of the customer
and maintain the minimum requirement (Gowid, Musharavati, and Hamouda, 2019). It helps in
ordering and storing the inventory in the organization. By inventory management system
manager can manage the inventory level in the company or warehouse or on the scarcity of
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inventory they can order the inventory from the other department to maintain their inventory
level and provide the goods to the customer within proper time and place. The aim of inventory
management is to estimate the inventory level and manage the under stock and over stock of
inventory in the warehouses.
Cost accounting system
Cost accounting is used by manufacturers to record the activities of production department. It is
also known ad product costing system or costing system. KEF Ltd. use the cost accounting
system in their organization to regulate the flow of inventory at the various stages of the
production system (Lu, Gu, and Predko, 2015). It helps to estimate the cost of the product and
services of the organization and calculate the profitability and productivity of the organization.
The main cost included in job costing is job order cost and process costing.
Job costing system
The purpose of job accounting system is to determine the cost of the particular job of the
business. It is used to assign and accumulate the manufacturing cost of an individual unit of
output in the organization. The requirement of job accounting in KEF Ltd. is to accumulate the
manufacturing cost. It is mainly used when the output are sufficiently different from the other
and each unit of output has significant cost. Through the job costing management system an
accountant or manger can keep track of each job cost and maintain the data which are relevant to
the operation and management of the business.
Price optimization system
Price optimization system is the process of finding the pricing sweet spot and maximize the price
of the product against the customer willing to pay the price. Price optimization system is used by
the KEF limited to determine the price of their product against the customer willingly pay to
their competitors to attract the customer toward their organization. It helps the organization to
calculate the demand of the product with the changes in the price.
Different method used for management accounting reporting
Management accounting report helps the small and medium size business like KEF limited to
monitor the performance of their company and prepare the budget by estimating the cost of the
organization for the particular accounting year. On the basis of their business and business
activity the manager and owner of the KEF limited company change their reporting system by
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annually to monthly, weekly or quarterly. Different method used for management accounting
report are as follows :
Budget report : In small kind of business budget report help to analyse the performance of the
company and large business it helps to analyse the performance of each department to measure
the profit and loss of the organization. KEF limited company use the previous year expenses for
estimating the budget of the current year. If the budget of the previous year is over budget and
company is unable to find the way then they need to be increased the more accurate level of
budget for the organization (Jacobs, 2018). The budget reporting help the organization to
regulate and control their expenses to manage the cost and to increase the profit of the
organization. It also helps the organization in providing incentives to their employees to enhance
their performance and achieve the goal of the organization.
Account receivable Aging report
The account receivable tool is used to manage the cash flow of the organization which extend
their credit to their customer. The KEF limited company use the account receivable aging report
to regulate the company collection process and strengthen their credit policies. Report break
down the balances of the customer and keep track the record of the time period of not paying the
amount. The manager uses the report to analyse the problems in collecting the amount from the
customer and tighten their credit policies for the customer who are not pay their dues. The
manager regulates the report periodically and manage their old debts to increase their profit.
Job cost report
It is used to present the cost of particular job. The manager compare the job cost with the
estimated revenue to evaluate the job profitability of the organization. KFG limited company use
the job cost report analyse the profit margin of each job. After analyse the profit margin of each
job they focus on the high margin job rather than to wasting their time in low profit margin job.
It helps in estimating the expenses when the project is in progress so the manager can minimize
their expenses and wastage to increasing their profit margin of KEF limited company.
Inventory and manufacturing
Management accounting report help the business to maintain the physical inventory and the
products (Dunant, and et.al., 2019). It makes the manufacturing process more efficient. It records
the inventory cost, per hour labour cost and overhead cost of the organization. The manager of
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KEF limited company compare the assembly line of different unit and analyse the area where the
improvement id needed.
Benefits and application of management accounting in the organization
Benefits of management accounting
Reduce expenses : Management accounting help the KEF limited company to reduces their
operational expenses by providing the data of each job cost and findings the gap in the
organization for improvement.
Improve cash flow : The budget re[port of the management accounting help the organization to
estimate the expenses and evaluating the sources of income which ultimately improve the cash
flow of the KEF limited company.
Business decision : It also helps to take the useful decision for the organization by evaluating the
performance of each employee and estimating the cost. The data help in analysing the various
alternatives and evaluating their outcomes and help in making the decision of selecting the best
alternative (Rashidi, and et.al., 2016).
Increase the profit and productivity : It helps the KEF limited company to forecast the demand
of the organization and maintain the inventory level to minimize their maintenance cost which
ultimately increase the profit of the organization. It also helps to keep record of the price of the
competitors in the market and adjusting the price according to the profit margin.
Evaluation of management accounting system and management accounting reporting
The aim of management accounting is to transfer information to the managers, so they can take
the decision for the organization. The role of management accounting is to formulate the
financial strategies, monitor expenses of the organization, explain the financial consequence and
maintain the profitability and the productivity of the organization.
Benefits of management accounting system
 It measures the actual performance of the organization by comparison with the budget.
 It helps in take the useful decision for the organization.
 It provides the useful information to the managers and reduces the maintenance cost.
 Management accounting helps in increasing profit and performance of the organization.
Limitation of management accounting system
 It is based on the manually maintained records.
 The preferences of accounting depend upon the intuition and experience.
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 Not an ideal choice for all kind of business.
Management accounting reporting : Management accounting report is depended upon the
financial statement like cash flow, balance sheet, profit and loss account and also include the
performance, budget and cost reports of the product (Jia, and et.al., 2017).
Benefits of management accounting reporting
 It helps in estimating the cost of the organization
 It prepares the budget on the previous year budget
 It helps in identifying the weaknesses of different areas
Limitation of management accounting report
 It requires the knowledge and skills to keep track record of the organization activities.
 Lack of continuity and coordination delay the functional activities.
TASK 2
Income statement by using marginal and absorption cost
Production cost : production cost refers to the cost incurred by the organization in
manufacturing the goods and services (Ashraf, and Uddin, 2016). It includes the cost of labour,
material, operating expenses etc. in the organization. The production cost per unit of KEF limited
are :
1. For marginal costing the production cost per unit are :
Direct material 20
Direct labour 12
Variable production overhead 8
Per unit production cost 40
For absorption costing the per uni production cost are :
Direct material 20
Direct labour 12
Variable production overhead 8
Production overhead 120000/20000
Per unit production cost 46
2. Total production cost.
For marginal cost
Total production unit = 19000
Per unit cost = 40
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Total production cost = 760000
For absorption cost
Total production unit = 19000
Per unit cost = 46
Total production cost = 874000
3. Total cost of sales for June month.
For absorption cost
Opening stock 2000 46 92000
Add: purchases 19000 46 874000
Less: closing stock 3000 46 138000
Cost of sales 828000
For marginal cost
Opening stock 2000 40 80000
Add: purchases 19000 40 760000
Less: closing stock 3000 40 120000
Cost of sales 720000
4. Profit and loss account for June.
For absorption cost
Particulars unit
Per unit
cost gross Net
Sales 16000 60 960000
Less: COGS
Opening stock
Add: purchases 18000 46 828000
Less: closing stock 2000 46 92000 736000
GP/ NP 224000
For marginal cost
Marginal costing
Particulars
Sales 16000 60 0 960000
Less: COGS
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Opening stock
Add: purchases 18000 40 720000
Less: closing stock 2000 40 80000 640000
Contribution 320000
Less: fixed 120000
Net profit 200000
5. Difference Profit and loss statement for June.
For absorption cost
Particulars unit
Per unit
cost gross Net
Sales 16000 60 960000
Less: COGS
Opening stock 2000 46 92000
Add: purchases 19000 46 874000
Less: closing stock 3000 46 138000 828000
GP/ NP 132000
For marginal cost
Particulars
Sales 16000 60 960000
Less: COGS
Opening stock 2000 40 80000
Add: purchases 19000 40 760000
Less: closing stock 3000 40 120000 720000
Contribution 240000
Less: fixed 120000
Net profit 120000
6. Costing techniques.
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Activity based technique is the best technique for identifying the cost of the business. It is an
accounting method which help the organization to identify and assign the cost to overhead
activities than assign the cost to the products. It helps in recognize the relation between the cost,
overhead and manufactured product. It provides the accurate cost and cost behaviour to t he
organization. The KEF limited company can also use the ABC costing technique for getting
profit of the organization.
TASK 3
Advantages and disadvantages of planning tools used for budgetary control
Budgetary control is the system to manage the organization activities by comparing the actual
income with expenses to evaluate the formulated plan and their performance and change the plan
if they needed to achieve the profit (Budgetary Controlling Techniques, 2017.). The different
types of budget are capital budget, financial budget, master budget, cash flow budget and
operational budget. The planning tools used for budgetary control are cash budget, operating
budget and zero base budget.
Cash budget : Cash budget are used to maintain the cash level for meeting the day to day
activities expenses. Cash budget is prepares to estimate the cash inflow and outflow of the KEF
limited company. It helps to estimate the cash budget of the organization and assess whether the
organization has sufficient balance or not.
Advantages
Avoid the debt : It allowed the organization to spend the cash on the organizational activities
and avoid the debt of the company.
Communicate financial position : Cash budget helps to communicate the financial position of
the company to its stakeholder and determine the current and future of the organization. KEF
limited company prepare the cash budget to ensure the availability of cash in the organization
and maintain the cash level to meet the organization objectives.
Disadvantage
Limits spending power : To switch on the uses of cash budget for the organization, it limits the
spending power because most of the business stopped to use the cash and deal in credit card.
Only using the cash budget id difficult to run the business.
Estimate to meet future needs : Cash budget is prepare on the basis of the basis of the last year
cash inflow and outflow, so it only provides the estimation to the KFG limited company.
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Operating budget : Operating budget helps in estimating the operational area where the
organization need cash to meet the requirement of the organization. It helps the KEF limited
company to estimate the position of the organization in the global market.
Advantage
Long term planning : Operating budget helps in preparing the long term plan with t he short
term plan of the organization so the company can estimate the future position in the market.
Flexibility : It provides flexibility to the organization to change the activity according to t he
available resources and fund to manage the organization.
Disadvantage
Time consuming : To prepare the long term operating budget of KEF limited company, it
requires the huge research which unnecessarily increase the cost and time of the organization
(Kajaste, and Hurme, 2016).
Zero base budgeting : In zero base budgeting the manager prepare the budget from the Zero
level or bottom to divide the organization into package and evaluating the cost of each package.
Advantages
Accuracy : It start with the zero level. It provides the accurate result to the organization for
preparing the budget and maintaining the cost of the organization. It helps the KEF limited
company to estimate the cost hiring new employees, estimating the wages etc. for the
organization.
Justify all expenses : It helps the organization to justify all the expenses of the organization by
regulate the operating expenses and consider this area which generate revenue for the
organization.
Disadvantage
Manipulation by the manager : It can be manipulated by the savvy managers to acquire more
resources in their organization and get the benefit of the resources.
Resource intensive : It consumes lot of time and cost to estimate the budget of the organization
because it start with the zero level. To prepare budget from the ground level manager has to
invest lot of time and resources in research.
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Application of planning tools in preparing and forecasting Budget
 The financial planning tools help in estimating the cost of different department and
prepare the budget to compare the cost with the revenue which ultimately help in
preparing the budget.
 Planning tools provide the data and resources to the manager to forecast the demand of
product and services of KEF limited company and prepare budget.
 Planning tool like cost budgeting provide the detailed cost of each activity or area and
help in preparing the budget by evaluating each area. It also helps in managing the overall
cost with the budget.
TASK 4
Adaption of Management Accounting system for resolving financial problems
Below discussed management accounting systems can be adapted to eliminate financial
problems by different organizations-
Basis KEF Limited Tesco
Balanced Scorecard Activities of employees and
other members of KEF Limited
can be monitored and
controlled with the help of
Balanced Score Card which in
turn benefits company in
improving its operational
performance and provides
effective utilization of
resources. This tool play a
significant role in improving
skills of employees and
managers.
By adapting management
accounting system in Tesco
performance of employees and
managers get maximized which
in turn provides effective
utilization of financial
resources. This further reduces
problem of wastage and with
that company can enhance its
sales volume(Chenhall and
Moers, 2015).
Key Performance Indicator Different Key Performance
Indicators are used by company
for minimizing financial
Key Performance Indicators is a
problem solving tool used by
Tesco with an objective of
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problems. KEF Limited uses
KPI for analysing performance
of its operations. Ratio and
Cash Flow analysis is
implemented by accountant
with the purpose of resolving
issue of liquidity. Further,
company can increase its
earning per share and return on
capital employed by analysing
different types of ratios.
improving performance of its
employees. For this purpose
company calculate revenue
generated by each employee
and sales made by them which
in turn enhances profitability
and market share of company.
Moreover, firm use KPI to
determine profitability of each
of store and with managers can
improve offerings of stores
which are offering low profits.
Finance Governance If a company is adapting
management accounting system
in its organization than it is
mandatory for company to
follow all the applicable
accounting & financial policies.
Managing financial of a
company with applicable
policies & procedure helps
company to overcome from
financial issues. This is also
beneficial for KEF Limited for
achieving its corporate
objectives and
profitability(Barry and Dent,
2017).
Tesco prepare all of its
accounting books and manage
its financial after adapting
applicable guidelines and
procedures in order to keep
accurate record of financials.
Further, managers of company
are able to minimize cost of
selling and marketing by
monitoring financial statements
of company. Thus, this tool
helps a company in achieving
high profits, customer base and
market share.
Financial Problems in an organization can be easily resolved with the help of management
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accounting systems. Decrease in sales volume, cost, operational performance, liquidity problems,
shortage of financial resources, increase in tax rate and minimization in profits & revenue are
financial problems faced by companies and if all these problems are monitored and controlled by
financial accountant of KEF (Limited) than Company can achieve high market share and growth
in long run.
Problem of cost maximization and decrease in revenue can be solved by managers of KEF
Limited by preparing flexible Budget. Further effective utilization of available resources
eliminate unnecessary cost involved in production process with that company is able to earn
profit even in the situation of increasing tax rate and this also provides waste management with
that KEF Limited is able to expand its market(Azudin and Mansor, 2018).
Use of Planning tools in resolving financial problems
Monetary issue occurring in an organization can be resolved by implementing various
tools discussed below-
Budgetary Control- Budgetary Control is a financial tool used for monitoring &
controlling actual operational performance of company by comparing it with budgeted
information. This tool is important as with this internal managers of KEF Limited are able to
minimize cost and maintain it with estimated cost. Further, managers are able to allocate
companies financial and non financial resources in the most effective way. This tool provides a
statement which contain detailed information about future expenses, income, revenue and cost.
Moreover, all information included in Budget are in accordance with objectives and future goals
of company thus, with this KEF Limited can achieve success in long run.
Financial Planning- It is necessary for each organization to make decisions related to
expansion, diversification, capital investment and management of funds KEF Limited take all
these decisions with the help of Financial Planning tool. Further, this tool is important for
company in formulating strategies and deciding overall financial framework of company so that
firm can met its objectives and other requirements. Thus, this tool is play a significant role in
business expansion(Ahmad and Mohamed Zabri, 2015).
CONCLUSION
The above stated report outlined meaning of management accounting. Further, this report
summarizes various form of management accounting systems. Furthermore, this report concludes
significance of management accounting system. After that, this report outlined different
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techniques of management accounting. Moreover, the above report summarize advantage &
disadvantage of different planning tools of budgetary control. At last, this report concluded with
adaption of management accounting system in resolving financial issues.
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REFERENCES
Books and Journals
Ahmad, K. and Mohamed Zabri, S., 2015. Factors explaining the use of management accounting
practices in Malaysian medium-sized firms. Journal of Small Business and Enterprise
Development. 22(4). pp.762-781.
Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of
organizational DNA, business potential and operational technology. Asia Pacific
Management Review. 23(3). pp.222-226.
Barry, J. and Dent, M., 2017. New public management and the professions in the UK:
reconfiguring control?. In Questioning the New Public Management (pp. 7-20).
Routledge.
Chenhall, R.H. and Moers, F., 2015. The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society. 47. pp.1-13.
Gowid, S., Musharavati, F. and Hamouda, A., 2019. Cost Benefit Analysis of a Net-Zero Energy
Housing in Qatar. Journal of Clean Energy Technologies, 7(3).
Lu, S., Gu, Y. and Predko, R., 2015. How to Assess Risks in Weak Links in Cold Chain
Distribution Process?.
Jacobs, B., 2018. The marginal cost of public funds is one at the optimal tax
system. International Tax and Public Finance, 25(4), pp.883-912.
Dunant, C.F., and et.al., 2019. A marginal abatement cost curve for material efficiency
accounting for uncertainty. Resources, Conservation and Recycling, 144. pp.39-47.
Rashidi, J., and et.al., 2016. Thermodynamic and economic studies of two new high efficient
power-cooling cogeneration systems based on Kalina and absorption refrigeration
cycles. Energy conversion and management, 127. pp.170-186.
Jia, Z., and et.al., 2017. Adsorption of low-cost absorption materials based on biomass
(Cortaderia selloana flower spikes) for dye removal: kinetics, isotherms and
thermodynamic studies. Journal of Molecular Liquids, 229. pp.285-292.
Ashraf, J. and Uddin, S., 2016. New public management, cost savings and regressive effects: A
case from a less developed country. Critical Perspectives on Accounting, 41. pp.18-33.
Kajaste, R. and Hurme, M., 2016. Cement industry greenhouse gas emissions–management
options and abatement cost. Journal of cleaner production, 112. pp.4041-4052.
Online
Budgetary Controlling Techniques. 2017. [Online]. Available through
<https://iedunote.com/budgetary-controlling-techniques>
Management accounting. 2019. [Online]. Available through
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<http://www.businessdictionary.com/definition/management-accounting.html>
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