Management Accounting System and its Application: A Comprehensive Analysis

This report delves into the significance of management accounting in enhancing company performance and decision-making. It explores various types of management accounting systems, including managerial, inventory, and cost accounting, and critically evaluates their benefits and applications within an organizational context. The report further examines the differences between absorption costing and marginal costing, providing illustrative income statements and a reconciliation statement to highlight the discrepancies in profit calculations. Additionally, it compares and contrasts three planning tools used in management accounting: standard costing, budgetary control, and decision making, analyzing their effectiveness in addressing financial problems and guiding organizations towards sustainable success. The report concludes by emphasizing the crucial role of management accounting in navigating financial challenges and achieving long-term organizational goals.

Management Accounting System and its application

Table of Contents
Section I..........................................................................................................................................3
[P1] Explain why management accounting is important in the decision-making process for
improving the performance of the company...............................................................................3
[P2] Explain three different types of management accounting systems used for
management accounting reporting..............................................................................................5
[P3] Critically evaluate the benefits of types of management accounting systems and their
application within an organizational context..............................................................................6
[P4.(a)] Prepare and present two different income statements under absorption costing and
marginal costing for each of the two quarters............................................................................7
[P4.(b)] Explain with supportive calculations, why the profits under techniques are
different........................................................................................................................................11
[P4.(c)] Produce a reconciliation statement of profit or loss showing the reconciled profits
for the two techniques used previously......................................................................................12
Section II.......................................................................................................................................13
[Part A] Compare and contrast three different planning tools used in management
accounting. Analyse and evaluate how the use of planning tools for accounting respond to
solving financial problems to lead the organization.................................................................13
[Part B] Compare ways in which management accounting is applied. Analyse how, in
responding to financial problems, management accounting can lead organizations to
sustainable success.......................................................................................................................15
Conclusion....................................................................................................................................16
References.....................................................................................................................................17

Section I
[P1] Explain why management accounting is important in the decision-making process for
improving the performance of the company.
Management accounting is a broader concept as it involves various aspects. Each and every
branch of study of management accounting has different implications and aims to achieve
organizational goals and objectives. The formulation and implementation of management
accounting will help all the levels of management working within an organizational structure.
Role and significance of the management accounting in the decision making the process so that
the overall performance of the company can be improved are as follow:
1. The important and prominent feature of management accounting namely, financial accounting, is
used by the top-level management to take various crucial decisions (Ada & Ghaffarzadeh, 2015).
With the proper implementation of financial accounting, the true and actual profitability can be
determined. This will also help to satisfy the requirements of all the stakeholders as they are
always interested in the business affairs of the concerned business enterprise.
2. With the assistance of management accounting, the per unit cost can be determined and
identified. This information relating to per unit cost helps to take crucial decisions regarding cost
control and cost reduction to the extent possible (Guga & Musa, 2015). The management
accounting facilitates to take compare per unit cost with the rival firms operating in the business
environment.
3. The management accounting helps to identify the unprofitable segment or unprofitable
individual product or service as a result of which the overall profit can be achieved. As such,
through management accounting, the top level can focus on core activities so that overall
objectives can be achieved.
4. The implementation of management accounting will help to diversify the business so that it can
prosper and flourish and achieve competitive advantage over its rival firms. As such, the top

level management can take crucial decisions which will help to capture market share in the
market.
5. Under management accounting, different types of budgets are prepared by the all the segments
operating or functioning in the business enterprise (Breuer, et. al., 2013). Preparation of budget
helps to establish standards or benchmarks for every department which it aims to achieve within
a specified time span.
6. The information generated from the application of several costing principles can be analyzed on
the basis of which several decisions can be taken. The application of costing principles need to
be carefully applied by the management to get the accurate and correct result. For this purpose,
the cost accountant should be well skilled and have expert knowledge.
7. The management accounting helps to measure the performance by identifying key performance
indicators. Measuring the actual performance will help in the decision-making process. If the
management is unsatisfied with any particular segment or department, the management can take
suitable and appropriate decision against the responsible officer.

[P2] Explain three different types of management accounting systems used for
management accounting reporting.
Under management accounting systems, different types of reports are prepared so as to take
several crucial and strategic decisions. All these reports play a major and dominant role in
management accounting reporting. These reports come under management accounting reporting.
Some of the major three different types of management accounting systems are listed below:
Image 1: Types of management accounting systems used in management accounting reporting
Source: By Author,2018
From the above image, it can be observed that there are three predominant types of management
accounting system implementation of which is crucial in almost every business enterprise be it a
manufacturing concern or a non-profit organization. As such, these are the basic classification of
management accounting system which needs to exist in every organization and industry. These
are explained below one by one:
Managerial accounting: This branch of management accounting is planning concept. As such,
the managerial accounting is implemented at the top level or the strategic level of management.
The objective of managerial accounting is to regulate and control the business operations in a
lucid and understandable manner (Guga & Musa, 2015).
Types of management accounting
systems:
Managerial
accounting
Inventory
accounting Cost
accounting

Inventory accounting: The inventory accounting deals with the maintenance of records relating
to stock. Under this branch of study, inventory is classified into various categories namely raw
materials, work in progress, finished goods and spare parts. The inventory accounting can be
done to have a better control on inventory and helps in identification of pilferage or loss of
inventory (Breuer, et. al., 2013).
Cost accounting: The cost accounting deals with the costing principles of products and services
dealt with by the concerned business enterprise. As such, it helps in the determination of actual
cost incurred to produce the products or services.
[P3] Critically evaluate the benefits of types of management accounting systems and their
application within an organizational context.
Benefits of Managerial accounting:
1. The managerial accountant prepares and presents different types of managerial reports including
budget reports, performance reports and cost reports. These reports are strictly meant for the
internal purpose.
2. Under managerial reporting, generally, all the reports prepared the managerial accountant serves
the needs and requirements of the board of directors. This is the major difference between
managerial accounting and financial accounting. In financial accounting, the information is
generated to serve the needs of shareholders (Sukhia, et. al., 2014).
Benefits of Inventory accounting:
1. With the assistance of inventory accounting, the physical verification of inventory can be done
easily. This helps to identify and loophole in the inventory management system.
2. The data and information obtained through inventory management system need to be compared
with the records maintained online or in the books of the store. The difference between the
records and physical verification can arise due to error or mistake in records maintained or
counting during verification (Omotayo, 2015).

Benefits of Cost accounting:
1. The cost accounting helps to correctly determine the per unit cost of all the products and
services. For this purpose, the allocation of cost needs to be done to the various products. This
can only be done only if the cost accountant has proper knowledge of cost components (Ada &
Ghaffarzadeh, 2015).
2. With the implementation of cost accounting system in the organizational structure in any
business enterprise, the segregation of cost into various parts can be done easily. Cost can be
classified into various categories depending on various factors. For instance, the cost can be
segregated into fixed and variable. Other classification can be manufacturing and selling and
distribution expenses.

[P4.(a)] Prepare and present two different income statements under absorption costing and
marginal costing for each of the two quarters.
Quarter 1:
Statement of profit and loss using absorption costing:
Particulars No. Of
units
£/unit £ £
Sales value (Revenue) 66,000 1 66000
Less Cost of sales
Opening inventory 0 0.85 0
Add: Production cost(variable & fixed) 78,000 0.85 66300
Less: Closing inventory 12000 0.85 10200 56100
Gross profit 9900
Less Selling & administration cost 5200
Profit 4700

Statement of profit and loss using marginal costing:
Particulars No. Of
units
£/unit £ £
Sales value (Revenue) 66000 1 66000
Less Cost of sales
Opening inventory 0 0.65 0
Add: Production (Variable/
marginal cost)
78000 0.65 50700
Less: Closing inventory 12000 0.65 7800 42900
Contribution 23100
Less Fixed production cost 16000
Less Fixed selling & administration
expenses
5200
Profit 1900

Quarter 2:
Statement of profit and loss using absorption costing:
Particulars No. Of
units
£/unit £ £
Sales value 74000 1 74000
Less Cost of sales
Opening inventory 12000 0.85 10200
Add: Production cost (Both fixed and
variable)
66000 0.85 56100
Less: Closing inventory 4000 0.85 3400 62900
Gross profit 11100
Less Selling & administration costs 5200
Profit 5900

Statement of profit and loss using marginal costing:
Particulars No. Of
units
£/unit £ £
Sales 74000 1 74000
Less Cost of sales
Opening inventory 12000 0.65 7800
Add: Variable production
cost
66000 0.65 42900
Less: Closing inventory 4000 0.65 2600 48100
Contribution 25900
Less Fixed production cost 16000
Less Fixed selling &
administration expenses
5200
Profit 4700

[P4.(b)] Explain with supportive calculations, why the profits under techniques are
different.
The costing income statement can be prepared either as per absorption costing or as per marginal
costing. However, the income computed as per both the costing approach will be different. This
is because the costs are classified according to different criteria or perspective under both the
costing approach (Sukhia, et. al., 2014).
Under absorption costing approach, the costs are classified into production and other operations,
for instance, selling and distribution costs. Accordingly, all the production cost, whether fixed
and variable will be included in the production cost. As a result, the stocks are valued at
production cost (Omotayo, 2015).
Similarly, under marginal costing, costs are classified into the variable and fixed cost. Under
variable costing, all the marginal costs covering both the production related and selling expenses
are added. Stocks under marginal costing are valued at variable cost, including both production
cost and variable cost.

[P4.(c)] Produce a reconciliation statement of profit or loss showing the reconciled profits
for the two techniques used previously.
Reconciliation statement of Quarter 1:
Particulars Q1
Profit under absorption costing 4700
Less: Under absorption of overhead under
absorption costing
2800
Profits under marginal costing 1900
Reconciliation statement of Quarter 2:
Particulars Q2
Profit under absorption costing 5900
Less: Under absorption of overhead under
absorption costing
1200
Profits under marginal costing 4700

The above reconciliation statements of both the quarters explain the difference between the
income computed as per absorption costing and marginal costing. It can be observed that in both
the quarters the difference arises because of the under absorption of overhead under absorption
costing.

Section II
[Part A] Compare and contrast three different planning tools used in management
accounting. Analyse and evaluate how the use of planning tools for accounting respond to
solving financial problems to lead the organization.
Various planning tools and techniques are used in management accounting to plan for future so
as to ensure profitability. Some of which is an analysis of standard costing, decision making
accounting and budgetary control. Standard costing is done to calculate variances between the
actual cost and the standard cost so as to analyze the actual performance. This is the cost which
is predetermined by all the organizations so as to compete with the dynamic environment.
Decision making is the best tool to analyze and evaluate the profitability of the business.
Selecting most appropriate alternative helps in reducing the complexity arises from the business.
While budgetary control technique is a tool used to measure the performance of the business by
estimating the future needs. Budgetary control and standard costing both are based on the same
principle that is both the tools are predetermined and then the evaluation is done by comparing it
with the actual costs (Mamary, et. al., 2014).
Comparison and differentiation between the planning tools-
Point of Distinction Standard Costing Budgetary Control Decision Making
Basis It is based on the data
which is related to
production.
Budgets are prepared
according to the plans
prepared by the
management.
Decision making is
also done by the top
level managers for
best performance and
growth.

Scope It is a narrow concept. It is a wider concept
as compared with
standard costing.
Decision making is a
narrow concept.
Comparison Actual cost is
compared with the
standard cost to
evaluate the output.
Budgeted figures are
compared with the
actual figures under
budgeted control
analysis.
In decision making,
the predetermined
decisions are
compared to the final
output produced.
Applicability The standard costing
analysis is only
applicable to
manufacturing
concerns.
It is applicable to all
type of business.
Decision making is
done by the top
management in all the
organizations.
Changes It does not change
with the short-term
changes in the
business.
Budgeted costs
changes with the
change in the
organization.
Decision making also
varies with the
dynamic environment.
Reporting of
variances
Standard costing
shows the variances
between the figures.
Budgeted costing does
not show the
variances between the
figures.
Decision making is
done just to avoid the
future variances.
Proper decision
making leads to the
decrease in the
variances.

Term Standard costing is
done for the long
term.
It is done for both
short and long both.
It can be for short
term and long term.
Therefore, the budgeted control and standard costing are somehow similar to each other as both
the techniques analyze the performance of the business by calculated variances between the
actual as well as the budgeted figures. Whereas decision making is the initial step in every
organization towards the achievement of the organizational goals as the proper selection of the
alternatives must be done to attain growth. These planning tools are used by every organization
to measure the performance of the firm and to achieve the desired goals and objectives (Breuer,
et. al., 2013).

[Part B] Compare ways in which management accounting is applied. Analyse how, in
responding to financial problems, management accounting can lead organizations to
sustainable success.
Application of the management accounting is the way through which the organizations can face
the challenges in the environment and which will help the organizations to get rid of the financial
problems. With the implementation of the management accounting, the quality of the decision
making and the effectiveness will lead to superior performance. Strategic planning is done to
analyze the current and the future allocation of the resources. Organisations use various tools to
deal with the financial problems (Mamary, et. al., 2014).
Benchmarks are set to compare the performance of the products and services. It comprises of two
things to be considered while implementing the benchmark these are finding the appropriate one
and ensuring that the benchmark is valuable so that it can be easily compared. KPI’s is another
tool to respond to financial problems as this implies how the organization is competing with the
external environment according to the plan. These can be both financial as well as nonfinancial.
Financial KPI’s include cost, revenue, and profits whereas nonfinancial KPI’s include reliability,
flexibility, innovation, and performance (Mamary, et. al., 2014).
Financial governance can also be used as a tool because it is concerned with the financial
decision which helps to attain accountability. In the manufacturing industries application of the
management accounting is important as with this the earnings per share and the profit after tax
can easily be evaluated whereas in the real estate sector it is required to calculate the production
cost and the cost incurred in producing the particular product with that it also implies the value
of work in progress (Ada & Ghaffarzadeh, 2015). This disclosure will lead to the effective
decision making and ensure the increase in performance. To achieve the sustainable growth and
respond appropriately to financial problem, organizations adopt various strategies and business
models so that the social and economic challenges can be faced. Many companies agreed that
they have various skills to compete in the challenging environment.
According to the survey conducted sixty-seven agreed that combining of social and
environmental factors into decision-making process leads to the financial benefits. Companies

which use sustainability concerns believe that support strategic decision making is excessively
used by the organizations as compared with the risk management decisions (Guga & Musa,
2015). Through risk management decisions the firms can easily predict the risk factor and the
operational issues involved. However, with the adaptation of this decision making the
organizations will implement the risk-free decision-making strategies so as to respond to
financial problems faced due to the economic factors.
Development of the KPI’s and the setting or the using of benchmark will help in achieving the
strategic and the sustainable growth. Senior management is responsible for the long-term
sustainable success with the goal to manage change and generate value for shareholders. This
will identify the opportunities for managing the costs and risk (Guga & Musa, 2015). So this can
be seen that with the adoption of the sustainability the companies can evaluate the overall
performance and with that practice, the effectiveness of the management accounting functions
can be achieved. Management accounting is important for taking strategic decisions. Therefore,
the management accounting is essential to deal with the financial problems prevailing in the
business.

Conclusion
From the discussion throughout the report, it can be concluded that management accounting is
essential for every business enterprise. The report also covers the income statement as per
absorption costing and marginal costing. This is done to find out the difference in income
statements prepared as per two costing approaches. Besides, an attempt has been made to
understand the different types of management accounting. Understanding of these aspects will
help to find the solution to various financial problems being faced by any business enterprise.
Accordingly, the report deals with the implication of management accounting in responding to
financial problems. This will help to retain existing customers as well as attract or entice new
customers.

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