Management Accounting Systems and Techniques

This document provides an overview of management accounting systems and techniques. It covers topics such as different types of management accounting systems, methods for management accounting reporting, techniques of cost analysis, and more. The document also discusses the benefits of management accounting systems and their application within an organization. It is suitable for students studying management accounting or anyone interested in learning about this topic.

MANAGEMENT
ACCOUNTING
SYSTEM AND
TECHNIQUES

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1: Management accounting and different types of management accounting systems:..............1
P2: Different methods for management accounting reporting:....................................................3
M1: Benefits of management accounting system and their application within an organisation: 7
D1: How management accounting system and management accounting reports are integrated
within an organisation:.................................................................................................................8
TASK 2............................................................................................................................................8
P3: Techniques of cost analysis to prepare an income statement:...............................................8
M2: Range of management accounting techniques for financial reporting:..............................10
D2: Explanation of financial reports in range of business activities:........................................10
TASK 3..........................................................................................................................................10
P4: Different types of planning tool and their advantages or disadvantages:............................10
M3: Planning tools and their applications for forecasting and preparing budget:.....................12
TASK 4..........................................................................................................................................12
P5: How organisations are adapting management accounting systems in respond to financial
problems:....................................................................................................................................12
M4: Analyse financial problems in management accounting can lead organisation to
sustainable success:....................................................................................................................14
D3: How planning tools helps in to solving financial problems:...............................................14
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting is an internal system that provides critical information to firm's
management so that it can used in operations decision making. Organisations uses it to measure
and evaluate its performance according to information. It involves preparation of financial
reports, decision making and activities within an organisation. Company which is selected for
this report is Capital joinery Ltd. It is firm that specialised in windows, doors and stairs. It was
founded in 2008, situated in London UK (Vetrov and 2017). This report covers various topics
such as requirement of different types of management accounting systems, method for used
management accounting reports and different cost techniques to prepare an income statement.
Apart from this it also covers different planning tools and their advantages or disadvantages and
the ways in which organisations adapting management accounting system to respond to financial
problems.
TASK 1
P1: Management accounting and different types of management accounting systems:
Management accounting is refers to preparation of business reports that helps
management to generate its business operations and helps in short term and long term decision
making. It helps in planning, managing, measuring, evaluating and interpreting information to
managers.
Management accounting system is an internal system of any firm that an organisation
used to measure and evaluate its operations or activities for the management of the entity. In
context to Capital joinery Ltd., management team of the firm uses this system to evaluate firm's
operations so that it can achieve its goals or objective in efficient manner. It provides an insight
towards organisations decisions that helps managers to take corrective actions. It also provide
financial health and statical information assist by strong software that supports an organisations
decision making. It divides overall business unit into different departments on the basis of
production and functions so that it will be easy for Capital joinery to evaluate its performance.
Management accounting principles that company used are influence, relevance, value and
trust. Influence means it provides an insight that is influential, Relevance it gives relevant
information, value is analysed and in context to trust is it generates trust by providing overview
and relevance information.
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Basis Financial Accounting Management accounting
Information mainly used for Information is use for external
parties of firm. External parties
such as shareholders,
customers etc (Upping, and
Oliver, 2016). Capital joinery
used it to show its business
position to shareholders.
Information is used by internal
parties. Internal parties
includes supervisors or
managers, employees who is
working in operations etc. the
firm is used it for internal
decision making.
Purpose of information To record the financial
performance of the period and
past performance of the
business for external parties.
It provides planning,
evaluating and controlling
process for the firm.
On the basis of time It is based on historical data.
Such as profit and loss
accounts, balance sheet and
cash flows. Capital Joinery
used on the basis of past
performance revenues and
expenses.
It used for future decisions.
Basically, includes firm's
operations and activities. Firm
used its for future decision
making for effective outcomes.
Area specialised The reports prepares on the
entire business.
It focuses on specific areas of
the firm. Area can be specified
by on the basis of function,
activities etc.
Different types of management accounting systems: There are various types of
accounting system that are:
Cost-accounting system: This is a management accounting system used by firms to
estimate its value for products to know about the profitability of the firm, inventory valuation
and cost controlling. Capital Joinery Ltd. Used this for setting its pricing strategy to analyse
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profitability of firm. It is helpful to identify where the firm is spending its money and from where
it earn. It leads to analyse and report for improvement of internal cost control and efficiency.
Essential requirements: For the cost accounting system the actual costs occurs by the
different manufacturing activities are required. The information is requires for managers and
operational level employees in order to short term and long term decision-making.
Inventory management system: This is a system for tracking inventory levels, sales and
orders. In Capital Joinery Ltd., the firm used in it's production sector for create a work order and
analysis of raw material requirement. It helps firm for knowing its position regarding inventory
so that it helps its producers to know about the orders.
Essential requirements: This requires for stock level information such as sales orders,
storage costs etc. The managers and higher authorities are required for it in order to maintaining
costs of production for setting prices. It helps organisations for maintaining its cots for higher
probability.
Job-costing system: Job costing is refers to analysis of procedure of company where job
is different and performed according to consumers demand (Wahyuni and Triatmanto, 2020).
The firm is used this system for analysing firm's operations according to consumers demand so
that it can control it by time. In context to Capital Joinery firm used it for analyse its procedure
according to users wants.
Essential requirements: It is required information such as how consumers demand
affects by firms pricing strategy. It is required by higher level authorities for managing firms
operations and sales. It helps organisation by setting prices in such manner so that it can satisfied
customers and helps to maintain firms probability.
Price-optimising system: This is a customer oriented system that utilization of
mathematical process to know different prices firm's products and services through various
channels. Capital Joinery used this system to know customers willingness to pay for its products
or services. It helps firm to set optimum price for its products or service so that it can achieve its
objective and maximize its profits.
Essential requirements: Firm collecting information related to the costs involves in its
goods and services. It is required by higher authorities for short term and long term decision
making. It helps it to managing profits and controlling higher expensive activities.
3

P2: Different methods for management accounting reporting:
Management Accounting Reports: It compiles information gained through financial
accounting of business. It is used to identify, measure, analyse, interpret and communicate
financial status of an organization to its manager. Motive of preparing such reports is to achieve
organization's set goals (Speckbacher, 2017). It can be done by assessing and informing
company's decision makers which will ultimately guide them is preparing efficient plans for
business operations. Different types of management accounting reports and importance of
preparing these reports for Capital Joinery Ltd. are discussed below:
Budgetary report: It is prepared to analyse how business manages its funding. It is an
estimation of revenues and expenditure of business. Capital Joinery Ltd. Should prepare this
report to investigate whether its estimated financial projections match with its actual
performance. By analysis such reports company can keep track of its expenditures which will
encourage business managers to increase savings which can be further utilised for firm's
expansion plan.
Inventory management report: This report is composed to examine about inventory stock
of business. Firm should prepare it to monitor its inventory status on regular basis. It prevents
any kind of stock outs, ensures management of safety stocks, and encourages record keeping and
results in on-time ordering of stock. It will also reduce extra maintenance expenses that firm will
bear on ordering more than required inventory.
Performance management report: Progress of employees of organization is reported and
measured by formulating this report. It is a worthwhile report which Capital Joinery Ltd. should
prepare to keep track of performance of their workforce (Imionescu and Bica, 2016). It will
ensure aligning of their performance with strategic goals of organization to increase profitability
and smooth functioning. Key improvement areas can also be identified by composing such
reports.
Account receivable report: It contains record of receivables of business. Capital Joinery
Ltd. Can prepare this report to ensure that debtors had paid their invoices on time. This will
reduce probability of bad debts. It will also verify smooth cash flow in firm to avoid hinders in
business operations.
4

M1: Benefits of management accounting system and their application within an organisation:
It is a process of providing financial resources or data to manager for decision making. It
is generally conduct by internally team, in this statistical data is used for a better decision. In the
Capital joinery limited, this system helps in increase efficiency of the firm by better operation
and compare the performance with their competitor (Schaltegger, 2018). Company can
maximise their profitability. Apart from these manager simplify the financial statement for
taking managerial decision. It also help in controlling the cash flow so that there is no misuse of
money is done. Through this organization run effectively in a productive manner.
D1: How management accounting system and management accounting reports are integrated
within an organisation:
Management accounting systems and reports are used in an organization to keep track
about financial status of business (Posch, 2017). It will provide key insights to managers which
will enhance their decision making and efficient functioning of Capital Joinery Ltd.'s business
operations.
TASK 2
P3: Techniques of cost analysis to prepare an income statement:
Cost: Monitory value of business expenses or spendings on production and selling of its
products and services is termed as 'cost'. It can be categorized in mainly three types which are
described below:
Variable cost: These costs are effected by the change in level of output in production. In
context to Capital Joinery Ltd., these are the variable costs incurred- cost of raw materials
purchased for producing windows, stairs, and doors or wages of labour employed in business,
etc.
Fixed cost: These costs have no effect of output level of firm. It includes, cost of
machinery and equipment purchased, land or building cost etc.
Semi variable cost: It consists components of both fixed and variable costs. These costs
fixed till certain level of production and becomes variable when it exceeds. For example,
commissions.
Cost analysis: Categorizing, studying and analysing cost incurred in business is defined
as 'cost analysis (ewo, Ajibolade and Obazee, 2019)'.
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Cost volume profit: it evaluates impact of volume and cost on operating profit of Capital
Joinery Ltd.
Flexible budgeting: On current level of output when revenue and expenditure of
business is forecasted, it is defined as 'flexible budgeting'.
Cost variances: It is difference between actual and estimated cost of an organization.
Absorption and marginal costing: Marginal cost indicates cost per additional unit of
production. It is a variable cost. On the contrary absorption cost is a total cost that involves both
fixed and variable cost.
Inventory cost: It refers to overall cost of products and services, not only the cost of
manufacturing but also refers to cost of keeping goods such as warehouse cost and maintaining
cost. It includes price from the manufacturing to delivered to customers. Inventory cost can be
divide into three parts such as order cost, carrying cost and shortage cost. Capital joinery used
this to recover its all over cost and maximise its profits ( Ojua, 2016).
Ordering costs: This cost refers to paying cost by customer that involves order cost,
delivery product cost and stock inventory. Capital joinery splits inventory into two parts:
 The cost of ordering process itself: It involves the cost of producing products as fixed
cost and independent of the number of unit cost.
 The inbound logistics costs: The cost is related to transportation and delivery of the
product that is variable in nature.
Carrying costs: Carrying cost of inventory is refers keeping cost or holding cost of
products in the warehouse. It includes warehouse cost such as rent, wages, opportunity cost,
insurance etc.
Shortage costs: It refers that cost that are occurs when a firm runs out of stock. In Capital
joinery firm faces this problem in reference to less stock availability in order to customers
demand. In this situation customers place orders but firm has not sufficient stock in their
warehouse or procedure.
Reducing in inventory cost leads to cost benefits to firm and probability maximisation of
the firm. Although it affects the pricing strategy of the firm (uhu and 2017). It helps in reducing
waste, improve supply chain management, demand forecasting, shorten the product life cycle or
distribution channel. It helps firm to maintain its warehousing cost and transportation cost. In
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context to Capital joinery Ltd. Reducing inventory cost will help firm for cost benefits and
maximising its profits.
Information should be reliable so that it cannot refers to mismanagement in the firm regarding its
performance. Correct information give a right path to firm for operating its activities in effective
manner. Right information is helps management team in decision making for the future purpose.
A strategic information system leads to success for long term in the firm.
Marginal costing:
Absorption costing:
7

Reconciliation statement:
Working notes;
8

LIFO (last in First Out):
DATE
RECEIP
T issue
balanc
e
quantity
unit
cost
amoun
t
quantit
y
unit
cost
amoun
t
quantit
y
unit
cost amount
01/06/20 balance 10 35 350
01/06/09 15 38 570 15 38 570
01/06/15 12 38 456 3 38 114
10 35 350
01/06/20 10 32 320 3 38 114
10 35 350
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10 32 320
01/06/23 10 32 320 3 38 114
10 35 350
01/06/27 3 35 105 3 38 114
7 35 245
01/06/30 2 35 70 3 38 114
5 35 175
27 951 8 289
AVCO (Average cost):
M2: Range of management accounting techniques for financial reporting:
Normal and standard costing: Normal cost refers to actual cost occur for the raw
materials and labour. Standard cost refers to predetermined cost for the product. Capital Joinery
used it for comparing actual price against its pre described price.
Activity based costing: It is a costing method that identify all costing during production
of goods or services. It includes cost of each activity and operational cost for producing product
or service (Macchia, 2019.). In context to Capital Joinery Ltd., firm includes its overall cost
occurring at the tine of production. It helps firm to know actual price for its products for deciding
the value of the product or services.
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In price setting process, cost plays vital role. Cost should be relevant in the pricing
decision and under estimation. It has direct relation, if cost will increased then price of the
product or service also increase. Because profit maximisation is depends on the products prices
that is depend on cost.
D2: Explanation of financial reports in range of business activities:
According to marginal costing net profit is in May 15400 and in June 10500 that refers
less profitability in June month. In absorption costing net profit shows 6400 in June and 4000 in
June that also represents less sell in June rather than May. Reconciliation statement also shows
that in June sales performance was less than May (Lay and Jusoh, 2017). In using of LIFO
method firm left inventory about 289 units and by using average cost method of inventory
valuation it shows 274 units that refers that average costing method is better for increasing sale.
TASK 3
P4: Different types of planning tool and their advantages or disadvantages:
Budget- It is a technique for estimation of revenue and expenses over a future period
which is re-evaluated on period basis. It is made by all enterprises, government, individual. It is
mainly built by the organization for the success of any financial undertaking. In the corporate,
final budget was prepared in the end of year through this the actual figure delivered through the
budget period come close to budget. it means manager run their business very well and if the
figure is not match then the company know the signal which is “out of control”.
In preparation of budget, First of all business entity have to take an outline of plan future
activities, then they determine their funds which are carry forward from past year. After that
estimation of expected income and needed expenses is determine, at the last all things are revise
and assemble into final budget (Horvat and Mojzer, 2019). It is maintain by set a minimum cash
balance. Budgeting control is method by which budget are prepared for future are compared with
actual performance to find that any variances occur or not, if occur corrective measure should be
taken. Capital joinery limited is also prepare a final budget at the end of year to know the
estimation of revenue and expenses over a particular period of time.
Types of budget
Capital budget- It is the method which include capital expenditure, means inflow and
outflow of money to finance the project, through this organization decide to invest in a project or
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not. It is used for long- term investment. Capital joinery limited also apply this budget for
investing in any new project.
Advantages of capital budget- It helps in the decision making in the organization because they
know the outflow and inflow of the money in the project for purchase of the machinery and sale
of the products. It also helps the company in making long term investment because they know
the inflow of the cash in their business. So they invest in some other project also for earning the
profit through capital budget.
Disadvantage of capital budgeting- it effect the long term flexibility of company, if the
decision taking by the company is wrong because capital budget show the cash flow if manager
make wrong decision then it is harmful for the company. It is based on the assumption because
future remain uncertain, manager make this budget on the factors that are uncertain which create
negative effect and it is difficult to achieve organization goal easily.
Operating budget – it is a method use by organization to meet the company areas which
require the money for their expansion. It is mainly use to meet debt obligation of organization.
Capital joinery limited also prepare this budget for assessing all areas which department have
requirement of funds (Dierkes, and Siepelmeyer, 2019).
Advantage of operating budget- It is used for planning long term and also help in company to
meet its financial obligation, this help the company in making future planning for each
department as per the obligation so they fulfil all the requirement of the funds. It also helps the
company in making the financial reserves, in this saving, investing are main benefits of this.
Disadvantage of operating budget- It is a time consuming method because in this manager
have to analyse the requirement of cash in every department so it takes time to prepare this
budget. In this more error is found in this budget because most of the time manager is not able to
find the requirement of the funds.
Pricing- It is the process by which business entity set the price by doing the research of
the market for their product or service. It is also include in the marketing plan. Capital joinery
limited also set their price by doing the survey of market that there is high demand of product or
not.
Pricing strategy- It is the technique through which organization determine the price for
the product. The price is set to maximize the profit or increase the sales and also to increase
market share (Diab, ,2020). Capital joinery limited is also use these strategy for taking
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competitive advantage in respect to their competitor. There are different types of strategies which
are penetration pricing, economy pricing and skimming strategy.
M3: Planning tools and their applications for forecasting and preparing budget:
Every organisation used different planning tools to preparing and forecasting budgets. It
helps firm for analyse its performance in reference to predetermined budget. In context to Capital
joinery the firm use planning tools such as operational budget and capital budget for forecasting
its performance. Firm uses operating budget for measuring its day to day activities. Whatever
operations firm done it helps it to determined its actual performance. It includes cost of goods
gold and revenues or income generated by daily business functions (Bromwich and Scapens,
2016). Capital budget is using to know expenditure occurs by its fixed asset such as plant and
machinery etc. both the budget helps business to analyse its expenditures and income which
directly or indirectly affects firms internal and external factors.
TASK 4
P5: How organisations are adapting management accounting systems in respond to financial
problems:
Financial problems: It is a situation or condition that is faced by business if it is not able
to pay its financial obligations owing to the fact that it has not generated sufficient income or
revenue. It lowers the creditworthiness of firm and improves its risk factor.
Following are types of financial problem that an organization faces-
 Mismanagement of cash flow: Capital Joinery Ltd. faces lack of cash flow management
which hinders flow of money in business. Reasons for this is that debtors often don't pay
bills on stated time, overhead costs are high, even their profit margin is low as compared
to services offered by them.
 Excessive spending: sometimes due to lack of proper planning, Capital Joinery Ltd.
ends up spending more actually required amount. Reasons for this can be excursive
promotions, ordering stocks more than needed which increases storage costs, increasing
credits and many more (Ax and Greve, 2017).
Measures that Capital Joinery Ltd. should use to avoid financial problems:
Company should maintain proper management accounting reports to keep track of its
expenditures and revenues which will avoid unnecessary spending and encourage savings and
13

timely receipt of payments. Inventory management reports will help in deciding quantity and
time or stock ordering. All these measures are helpful in maintaining cash flow in organization.
Approaches to financial problems:
 Benchmarking: This approach states that firm should compare its performance and
operations with another similar leading entity. Capital Joinery Ltd. should set
performance level and expenses criteria of another organization as benchmark to reduce
its excessive spending. In this way company can identify its problem areas and analyse
ways to cope up with it. This will result in reduction in expenditures and increment in
profitability.
 KPI: Key performance indicators is applied to evaluate the progress of business towards
desired result. Current and quick ratio, growth rate, conversion cycle of cash, these are
some important performance indicators that firm can set to avoid mismanagement of cash
flow (Arunruangsirilert and Chonglerttham, 2017).
 Corporate Governance: It helps firm to set its procedures, rules and policies so that firm
can solve its problems by management accounting approach.
 Balance scorecard: It refers to financial measures which shows results of those actions
which are already taken. By this firm solving its excessive spendings problems.
Difference between two companies:
Basis Tesco Sainsburry
SWOT Tesco using this model for
solving its fund management
problems. By analysing its
strengths and weakness it
helps it to arrangement of
funds.
In context to Sainsburry, the
company is solving its lack of
cash flow problem by
analysing its internal activities.
Balance scorecard By balance scorecard
technique it solving its
decrease in income issues. In
this it maintaining its financial
statements.
In context to Sainsburry firm
solving its excessive spendings
issues by optimum utilisation
of resources according to the
budgeted performance.
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M4: Analyse financial problems in management accounting can lead organisation to sustainable
success:
Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success: Management accounting has emphasis on actual
performance of business while taking into consideration objectives of an organization. Financial
problems that is faced by Capital Joinery Ltd. can be eradicated by using strategy of
management accounting and preparing its reports. Budgetary report evaluates expenditures and
revenues of business (Armitage and Webband Glynn, 2016). Hence, management can monitor
and avoid excessive spendings and encourage savings which can be used for business expansion.
Practice of preparing inventory management report in management accounting provide overview
for status of stock in business. It will result in on-time stock ordering and maintenance of safety
stock which will reduce maintenance cost of over stocking.
D3: How planning tools helps in to solving financial problems:
Planning tools helps firm to predetermine its expenses and revenues occur by its assets or
operations. It helps firm to track its performance whether it is runs in better manner or not. Firm
uses operating budget and capital budget as its planning tool so that it can measure and evaluate
its performance in order to achieve sustainable growth.
CONCLUSION
From the above report it has been concluded that management accounting is refers to
monitoring, measuring and controlling information by managers to operate its activities and
future decision making. Planning tools helps firm to comparing its actual performance in
reference to expected performance. It helps firm to control its expenses and revenues in that
manner so that firm can achieve its objectives in efficient manner. Management accounting helps
firm to solve its financial problem as well.
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