Management Accounting System Application: PDF

MANAGEMENT
ACCOUNTING L4

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Representing types of management accounting with its essential requirements...................1
B. Representing management accounting reports and their importance to management...........3
C. Representing advantages of mentioned system in A..............................................................4
D. Evaluating Integrated management accounting system.........................................................5
TASK 2............................................................................................................................................6
2.A Representing absorption and marginal costing method.......................................................6
2.B representing profit and loss statement on basis marginal and absorption costing................6
B. Calculation of break even point and Margin of safety...........................................................7
C. Representing significance of producing appropriate financial reporting documents.............8
D. Representing appropriate interpretation of data of business activities in above scenario......9
TASK 3..........................................................................................................................................10
A. Representing advantages and disadvantages of various types of planning tool for budgetary
control.......................................................................................................................................10
B. ..............................................................................................................................................11
C. Comparing the application of management Accounting system in Agmet and its
competitor British Chemical Product .......................................................................................12
D. Use of management accounting system for responding to financial problems....................14
E. Evaluation of planning tools to solve financial problems...................................................14
CONCLUSION..............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Management accounting plays very vital role for every business entity as it helps in
organizational growth and to sustain in this competitive world. The present study will discuss
about its types along with essential reports. This report will be providing understanding on this
concept by considering a SME as Agmet (Chemical company). It will cover managerial reports
which are mandatory for organization to attain success. Further, it will represent application of
various range of techniques with their numerical analysis. This report will discuss about Break
even point and margin of safety for recovering its initial cost of investment or to earn profit. In
the similar aspect, various planning tools will be discussed for budgetary control with its merits
and demerits. It will elaborate application of planning tools for analysing, forecasting budget and
will give comparison on basis of approaches for responding financial problems. Last but not
least, it will provide appropriate evaluation of these techniques for attaining sustainable success.
TASK 1
A. Representing types of management accounting with its essential requirements
Accounting is referred as summarising, classifying and recording each transaction on
basis each financial transaction. Management accounting is one of the most important parts of
accounting and other one is financial accounting. It is the process of performing appropriate
analysis of business operations and costs for preparing internal financial report, accounts and
records which help manager in process of decision making to accomplish its business objectives.
In the similar aspect, financial accounting is a special branch of accounting which consists of
proper record of each transaction. It has an application of standard guidelines while recording,
presenting and summarising transactions in financial or report like statement of profit and loss
and balance sheet (Nuhu, Baird and Bala Appuhamilage, 2017). The types of management
accounting are stated as below:
Job costing system: It is the method of tracing specific cost of manufacturing job instead
of process. It is the methodology of accounting which is used for tracing expenses of producing
unique product. The forms of job costing consist of spaces such as direct material, labour and
overhead. Information on the basis of production and service job might be required for
submitting cost information to particular customer. The accuracy of estimating company's
system has been determined through this information. For instance: designing software program,
building construction and cost of manufacturing small batch of products.
1

Inventory management system: It is the combination of procedure and technology
which oversees maintenance and monitoring products which are stored such as company assets,
supplies and raw materials are ready for passing it to vendors and end customers. A whole
inventory management system comprises for determining each component of inventory along
with its linked information like asset tags or barcode labels. The software of inventory
management gives central database along with point of reference to inventory gathered with
capability for producing reports, analysing data and to predict future demand. The process of
documenting, labelling and reporting are also included in this with important technique such as
First in First Out (FIFO), Just in time (JIT), stock review and many more.
Cost Accounting system: It is an internal reporting system which is used for the process
of decision making in business Agmet. This framework is used through organization for
estimating particular cost of products for the purpose of inventory valuation, cost control and
profitability analysis. It comprises of actual, standard and normal costing (Honggowati and et.al.,
2017). Actual cost: It is replicated as an actual expense which is performed for acquiring asset
which consists of supplier-invoiced expense along with delivering cost, testing and
setting asset. The approach of actual cost is unique with application of estimates for
deriving cost which might incur in the future.
 Normal cost: This cost is applicable for the valuation of manufactured products along
with actual direct labour and material cost as well as overhead of manufacturing is
predetermined on its rate.
2

Illustration 1: Basic Cost System
(Source: Cost Accounting system, 2018)
 Standard cost: It is practice for substituting expected cost for actual on basis of
accounting records and traces variances of periodically which reflect difference among
actual and expected cost.
B. Representing management accounting reports and their importance to management
Management accounting reports are applicable for regulating, planning, measuring and
decision making about the performance. These reports are produced on continuous aspect
throughout accounting period according to its requirements. There is the presence of various
critical decisions which are fully dependent on authenticity of specific reports. It should be
analysed through reports for highlighting specific patterns and for conversing in useful
information for Agmet (Accounting reports, 2017). There are various types of reports which are
stated as below:
Accounts receivable ageing reports: This report is vital for business who is heavily
reliable on extending credit. The remaining balance has been broken for its clients in specific
duration where managers are allowed for determining its defaulters along with problems in
process of company collection (Novas, Alves and Sousa, 2017). In this scenario, there are
various defaulters and so, organization might need to fulfil transformation to tighten the policies
3

of credit along with critical operations of Agmet. There is always some bad debt which must be
written off for owing. It helps in ensuring about presenting right information and in process of
decision making.
Accounts Payable ageing reports: It is referred as a specific tool which organizes
balance of business accounts payable which has been owed to vendors. The debt comprises
supplies, services and inventory which has been purchased for performing operations in Agmet.
It tracks information about creditors along with time and amount owned through debts. Debt
handling has been performed in the easiest and concise manner. This report helps in reducing
ambiguity and requirement of appropriate clarification.
Budget Report: This accounting report is a critical tool for measuring financial
performance of the organization. It might be generated on yearly, quarterly, half yearly or
monthly basis. Generally, these are produced department wise for big organization but Agmet is
a SME and so, it is formed on basis of whole entity. It is prepared on the basis of experience as
good budget always serves for unforeseen circumstances which might arise. Each source of
expenditure and earning has been listed in Agmet and tries for accomplishing its mission and
objectives to stay with specific budgeted amount. The main importance of this report is that it
guides managers for offering incentives to its employees and to cut cost with suppliers and
vendors as well.
C. Representing advantages of mentioned system in A
Cost accounting system
 The cost could be controlled with application of techniques like budgetary control and
standard costing.
 It helps in giving importance about cost to management for controlling, implementing
and planning.
 The cost reduction programs are implemented and introduced with this system.
 The total per unit cost of production has been ascertained along with fixing selling prices.
 The profitable and non profitable activities are disclosed which helps in enabling
management for substituting or to control activities of loss. It also develops and expand
marginal activities.
 The reliable information and data had been provided and comparison of cost among
period and processes are enabled (Ammar, 2017).
4

 The accuracy of financial accounts had been traced with appropriate preparation of cost
reconciliation statement.
 It is beneficial for financial and investment institutions with proper disclosure about
financial position and margin where investment is intended.
Job Costing system
 It helps in proper allocation of cost to its separate operations and to extract profit margin
on each job.
 This system enables for assessing employees performance of Agmet. Sufficient
information has been given for evaluating data of individual performance in context of
efficiency, cost control and productivity.
 The expenses which are incurred on every job of Agmet had been accessed during
process of manufacturing chemicals.
 It is most flexible for extracting particular indirect cost like overhead of manufacturing.
 The most accurate system on basis of specific criteria which directs particular kind of
cost towards proper accounts (Job costing, 2018).
Inventory management system
 The inventory has been managed on active aspect helps in increment of sales.
 Information transparency is improved within organization.
 The practices of effective management of inventory helps in reducing outcome of
inventory write-offs along with cost of lower inventory holding.
 The update of real time inventory has improved flow of goods to its customers. In short,
delivery performance is improved.
 It helps in increasing inventory turnover, customer loyalty and employee efficiency.
 Effective inventory management provides accurate planning and stock out is reduced
(Benefits of effective Inventory Management, 2015).
D. Evaluating Integrated management accounting system
The process of disseminating information of finance and recording transaction has been
standardised with integrated management accounting system. The reporting activities of various
functional areas of business are interconnected like stores, point of sale, front office and back
office. The input and output of information is streamlined with functions of financial reporting
and management accounting. The speed, efficiency and accuracy has been enhanced with this
5

specific adaption for processing financial information. In simple words, it simplifies
bookkeeping and accounts and substitutes complicated and tedious activities of reconciliation.
This system is basic necessity not choice as in this present scenarios, complexities are growing in
the world of modern business. There is huge demand of efficiency system for increasing the
performance of Agmet (Van der Stede, 2017).
TASK 2
2.A Representing absorption and marginal costing method
Absorption costing: This method could be stated as managerial cost method of expenses
related to cost of manufacturing of particular product. It engaged with application of cost of
direct and overhead on basis of product manufacturing on cost base. This is basic method which
is required by GAAP (Generally Accepted Accounting principles). Generally, it is absorbed
through generated units or it could be interpreted that cost of finished unit on basis of inventory
will consist of variable and fixed manufacturing overhead. It is fully contrasted with direct or
variable costing. With context of this costing, fixed manufacturing overhead cost is not assigned
with products which are manufactured. It is very important for process of decision making and
essential for income tax and external financial reporting.
Marginal costing: It is used for thorough understanding of various classes of cost on
basis of alteration in level of activities. This technique charges specific unit to cost as variable
while fixed cost for duration is fully written off from its contribution. This costing implies with
involvement of additional cost for generating extra unit of output as it could be reckoned through
allocation of total variable cost to single unit (Goddard and Simm, 2017).
2.B representing profit and loss statement on basis marginal and absorption costing
Income statement on basis of Marginal costing
6

Income statement on basis of Absorption costing
B. Calculation of break even point and Margin of safety
7

C. Representing significance of producing appropriate financial reporting documents
In the task 2, appropriate financial reporting documents are produced on basis of both
marginal and absorption costing method. With context of absorption method fixed cost are raised
with objective of production. The inclusion of these fixed cost for appropriate valuation of
ending stock is justifiable. The absence of fixed cost in inventory valuation, imaginary loss is
reflected in books of accounts when goods are not yet sold and replicated huge margin when
goods are sold. There is presence of fewer fluctuations in margin during constant production but
movement in sales. The cost and revenues are matched which is referred as proper match.
On basis of marginal costing, it's operations are very easy for understanding aspect. For
purpose of cost of production, fixed cost are not included which ignores misleading and
complicated statements (Lasyoud, Haslam and Roslender, 2018). Further, margins are not
8

overstated because of absence of absorption of fixed cost on unsold inventory. The decisions
could be qualitative through management on basis of details of contribution. Fixed expenses are
not dealt out on arbitrary aspect.
In the similar context, Break-even is mandatory for perfect business plan as it identifies
cost structure and units which are required to be sold to recover its initial cost or to make margin.
The margin of safety is replicated as variation among break-even and actual sales. It reflects
about amount of revenue decreased will be giving outcome in break even. Generally, high MOS
decreases risk with context of business losses.
D. Representing appropriate interpretation of data of business activities in above scenario
The above business activities has been framed in generating financial reports on basis of
marginal and absorption costing. It has also justified break even and margin of safety on business
aspect. The net income from marginal costing has been extracted as 17500 and from as it had
classified cost in fixed and variable category. This technique has facilitated recording of cost and
reporting as well. Main issue is on basis of segregating semi variable cost in elements of fixed
and variable which could be overcome by adopting any other method in this context.
On its contrary, implying absorption costing method has extracted net income of 17700
which is higher than method of marginal. This process had signified process which consist of
overhead in total cost of particular product. The cost of product is combination of both fixed and
variable production cost. It is also known to management for preparing invoices, sending
quotations, determining margin and to plan for future for various other costing objectives. In this
calculation, fixed cost are considered for recovering it from its customers. Hence, there is more
production as compared to sales and huge margin is extracted in absorption costing because of
valuation of closing inventory consists of fixed cost portion of specific period and shifted in next
duration.
Further, its financial reports had stated break even point in units and sales as well. It must
sell 222 units for reaching to break even and its sale revenue is extracted as 8888.89. In the
similar context, to earn profit of 10000, it has requirement of selling 593 units. This report has
extracted MOS as 0.722 when 800 units are sold (Lindholm, Laine and Suomala, 2017).
9

TASK 3
A. Representing advantages and disadvantages of various types of planning tool for budgetary
control
According to CIMA, Budgeting is referred as process for preparing detailed financial
statements which helps in recovering cost in specified duration in the future.
Operational budget: It is replicated as financial plan which is designed for helping to
accomplishing debt obligation of Agmet and to sustain growth over time. With creation of this
budget, it allows organization to observe spending of money and areas with huge requirement of
cash at most. The dependency of revenue figures of Agmet maintains particular budget as it
could be time consuming but inclined towards mistakes.
Advantages
 It keeps track of whole business which reflects spending and predicted money which is
going to be earned.
 The issues could be examined through managers about requirement of current or future
budget.
 This reports help in preparing financial responsibilities. It indicates monthly expenses for
business perspective as owner or manager has gained opportunity for recovering its
expenses.
 There are fewer chances about accurate budget for purpose of financial
misunderstandings.
Disadvantages
 There is presence of various complications about federal tax. In simple words, it provides
negative effect on Agmet at the time of paying taxes. Close attention has been paid to
through IRS at time of posting financial loss at each year.
 The information related to finance changes on monthly aspect as revenue projections are
accomplished through business or not. If operational budget does not alter in these
conditions for reflecting figures of new income or forecasts consist in operational budget
are inaccurate.
 The inaccurate projections might lead to shortfalls of cash and incapability for meeting its
financial obligations.
10

Cash Budget: This planning tool estimates cash outflow and inflow for specific business
at particular time duration. The liquidity has been assessed for operation with its level of
efficiency.
Advantages
 The coordination among all departments of Agmet is improved.
 Cost could be reduced and simultaneously margin is maximised.
 Concentration power of management, good understanding and relationship among
employees is improved.
Disadvantages
 The operation and cooperation of staff is fully interlinked with success.
 This tool is framed on subjective estimate.
 Time consuming for attaining its goals and expensive as well.
Master Budget: All small budgets are collected in business entity for getting brief
overview about business finance on basis of Agmet (Dai and et.al., 2017).
Advantages
 This tool compares actual performance from its budgeted as it would lead to job
satisfaction by considering growth contribution.
 It helps in determining unusual problems which are going to incur in the future.
Disadvantages
 Modifications are difficult as it consists of lengthy charts and descriptions.
 The divisional staff has to attain objective with various difficulties because of pressure
from top management. It would directly lead for estimating revenue with high expenses.
B.
Sept Oct Nov Dec Jan Feb
Receipts £ £ £ £ £ £
Cash sales 98000 105840 160540 297715 571771 1119582
Credit sale receipts
from debtors 74500 80460 87701 89455 91245 93069
Other income
received 32600 35208 38377 39144 39927 40726
11

Total receipts (a) 205100 221508 286618 426315 702942 1253377
Payments
Purchases 55700 60156 65570 66881 68219 69583
Wages- Labour and
overheads 10000 10800 11772 12007 12248 12493
Fixed costs 8650 8650 8650 8650 8650 8650
Capital expenditure
- Plant 35000 37800 41202 42026 42867 43724
Advertising 18900 20412 22249 22694 23148 23611
Total Payments (b) 128250 137818 149443 152259 155131 158061
Surplus/Deficit (a) –
(b) 76850 83690 137175 274056 547811 1095316
Balance b/f 0 76850 160540 297715 571771 1119582
Balance c/f 76850 160540 297715 571771 1119582 2214898
C. Comparing the application of management Accounting system in Agmet and its competitor
British Chemical Product
Management Accounting
System
Agmet British Chemical Product
Bench marking In this organisation present
performance is compared with
past as well as with
competitors (Klychova,
Faskhutdinova. and Sadrieva,
2014). Level of production
and sales revenues generated
are compared. Measures are
determined for applying in
business operation to
In British Chemical Product it
compares its level of activity
with companies of other
industries. This tool is used in
this business as increasing
production and sales from its
competitors. services renders
in a year are also set as a
measure for performance
12

achieving competitive
advantages.
evaluator.
Key performance indicator The main focus of Agmet is
on achievement of its key
objective through effective
used planning tools along
with carrying out evaluation of
its present performance.
This is considered as an action
which inspires. Most
importance aspect of KPI i.e.
communication is given
emphasis. In this organisation
KPI is used to determine clear
and relevant information and
then same is acted upon for
building up a better performing
team.
Ratio Analysis A tool to determine the
financial position and
performance of Agmet in an
accounting period. This is
implied in this entity as
calculation all profitability,
efficiency, liquidity and
solvency ratios and comparing
it with ratios of past year and
of its competitors.
In this organisation this
technique is used as
performance evaluator for past
few years and compares the
ratios with industrial ratio.
The financial position is
reflected through its ratio
analysis only.
Balance score card This metric is applied in this
firm as keeping emphasis on
betterment of the internal
operations so that effective
outcomes can be delivered.
Agmet employ techniques for
encouraging good behaviour
with firm in order to achieve
For this organisation, balance
score cared method is used for
effectively implementation of
measures having positive
impact on the internal
performance of the firm and
generating efficient results.
13

better profitability.
D. Use of management accounting system for responding to financial problems
Management accounting system in Agemt assist the manager to evaluate the
performance of the business in an accounting year with its previous performances as well as
compares the same with competitors. This helps an organisation in evaluation of its performance
and to set the measures to achieve organisational goals.
Bench marking: this can be defined as performance evaluator while comparing and
measuring performance of Agmet with its competitors (Hall, 2016). This is a process in which
product, service are compared with its rival companies and states the position of Agmet in
manufacturing industry. It involves studying the superior performances of companies and
braking down the criteria making them superior over others. With this determination Agmet can
implement changes that will result in significant improvements.
Key performance indicator: this is a tool which measured the fact that how effectively
Agmet is achieving key business goals. With application of this tool level up to which key
objective of the firm has been achieved will be determined at multiple levels for evaluating the
success at reaching targets.
Ratio Analysis: this is a tool used to evaluate financial performance of the organisation.
Compression can be done with past as well competitors performances. With use of this tool
Agment can find out the changes in its financial position over time and what changes in capital
structure or financial operations are needed to reach the level or to defeat its competitors.
Balance score card: this is a metric used to evaluate the performance of Agmet in
respect of measuring factors that create value for the business and have direct impact on ability
to perform (Chenhall and Moers, 2015). With use of this technique Agmet can identify and
improve various internal functions of firm for better external outcomes. With this good
behaviour can also be reinforced in the organisation by analysing different areas of business
operations.
E. Evaluation of planning tools to solve financial problems
Master budget: A master budget can be defined as strategic plan prepared for the future
of Agmet. In this expected future sales, production levels, expenses to be incurred, capital
investments are planned strategically. Master budgets of Agmet includes all financial budgets
14

as well as budgeted income statement and balance sheet. This is crucial for the organisation as
this shows management of Agmet the big picture for making decision about long term strategy
as well as forecasting progress of present year. With future forecast through various budgets it
can plan expansion as it posses all relevant information at one place. Requirement of cash and
raw material is predicted in advance so it can manage proportions accordingly.
Operating budget: this budget is purely related with presenting projected revenues and
associated expenses for upcoming period and is present in formate of income statements. For
Agmet it is of vital importance as with this variable cost, expenses related with raw material and
production labour is forecasted so timely arrangements can be (What Is an Operating Budget?,
2018). Along with this fixed cost related with operation of the business is also predicted and a
level of revenue is estimated which determined the profit margin expected by the managements
of Agmet. Preparation of operating budget is essential as with this only future profits are
estimated and operations can be directed for achievement of set target.
Cash budget: this is a budget which is specifically related with monetary transactions
in Agmet. With preparation of this engagement comes to know the actual inflow of the cash in
form of sales revenue ans outflow in form of production cost and pertaining expenses made
(AGMET Revenue, Growth & Competitor Profile, 2018). This is helpful in solving the financial
crises that can be faced by Agmet as with preparation of cash budgets i.e. budgeted cash flow
statements the future cost and income generation are estimated
and this assist the managers to take corrective measure to control the cost so that profits can be
increased. Similarly, actions can be taken to increase the sales which will also result in higher
gains.
CONCLUSION
From the above study it had been concluded that for accomplishing organizational
objective, management accounting is very important. It had shown interdependency of financial
and management accounting. It has articulated about different managerial reports with their
significance to management such as important for process of decision making and to project
future cash flow. In the similar aspect, it had reflected that absorption costing is efficient for
giving high net income because of high cost of production and appropriate classification of fixed
and direct expense.
15

REFERENCES
Books and Journals
Ammar, S., 2017. Enterprise systems, business process management and UK-management
accounting practices: Cross-sectional case studies. Qualitative Research in Accounting &
Management. 14(3). pp.230-281.
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.
Dai, N. T., and et.al., 2017. IPOs, institutional complexity, and management accounting in hybrid
organisations: A field study in a state-owned enterprise in China. Management Accounting
Research. 36. pp.2-23.
Goddard, A. and Simm, A., 2017. Management accounting, performance measurement and
strategy in English local authorities. Public Money & Management. 37(4). pp.261-268.
Hall, M., 2016. Realising the richness of psychology theory in contingency-based management
accounting research. Management Accounting Research. 31. pp.63-74.
Honggowati, S., and et.al., 2017. Corporate governance and strategic management accounting
disclosure. Indonesian Journal of Sustainability Accounting and Management. 1(1). pp.23-
30.
Klychova, G. S., Faskhutdinova, М. S. and Sadrieva, E. R., 2014. Budget efficiency for cost
control purposes in management accounting system. Mediterranean journal of social
sciences. 5(24). p.79.
Lasyoud, A. A., Haslam, J. and Roslender, R., 2018. Management accounting change in
developing countries: evidence from Libya. Asian Review of Accounting. 26(3). pp.278-
313.
Lindholm, A., Laine, T. J. and Suomala, P., 2017. The potential of management accounting and
control in global operations: Profitability-driven service business development. Journal of
Service Theory and Practice. 27(2). pp.496-514.
Novas, J. C., Alves, M. D. C. G. and Sousa, A., 2017. The role of management accounting
systems in the development of intellectual capital. Journal of Intellectual Capital. 18(2).
pp.286-315.
16

Nuhu, N. A., Baird, K. and Bala Appuhamilage, A., 2017. The adoption and success of
contemporary management accounting practices in the public sector. Asian Review of
Accounting. 25(1). pp.106-126.
Van der Stede, W. A., 2017. “Global” management accounting research: some
reflections. Journal of International Accounting Research. 16(2). pp.1-8.
ONLINE
Accounting reports. 2017. [Online]. Available through:
<https://www.completecontroller.com/types-of-managerial-accounting-reports/>.
AGMET Revenue, Growth & Competitor Profile. 2018. [Online]. Available through:
<https://incfact.com/company/agmet-oakwoodvillage-oh/>.
Benefits of effective Inventory Management. 2015. [Online]. Available through:
<http://www.mktalt.com/Blogs/top-benefits-of-effective-inventory-management.html>.
Cost Accounting system. 2018. [Online]. Available through:
<https://www.accountingtools.com/articles/2017/5/7/actual-cost>.
Job costing. 2018. [Online]. Available through: <https://strategiccfo.com/job-costing/>.
What Is an Operating Budget? 2018. [Online]. Available through:
<https://smallbusiness.chron.com/operating-budget-61475.html>.
17