Management Accounting Systems

This document provides an overview of management accounting systems and their essential requirements. It discusses various types of management accounting reports and their benefits. The document also includes calculations of cost analysis techniques for preparing income statements using marginal and absorption costs. Additionally, it explores the advantages and disadvantages of different planning tools for budgetary control.

Management
Accounting Systems

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Description of management accounting and providing essential requirements of different
systems of management accounting: ..........................................................................................1
P2 Describing various methods of management accounting reports:..........................................3
M1 Evaluating advantages of management accounting system and its application in context to
business:.......................................................................................................................................4
D1 Critically evaluating ways in which management accounting reports and systems are
integrated within process of organization:...................................................................................4
TASK 2............................................................................................................................................5
P3 Calculation of adequate techniques of cost analysis for the purpose of preparing income
statement by marginal and absorption costs:...............................................................................5
M2 Accurate application of techniques of management accounting for production of financial
reporting documents:...................................................................................................................9
D2 Production of financial reports that accurately applies and interprets business activities:....9
TASK 3............................................................................................................................................9
P4 Evaluating advantages and disadvantages of different planning tools of budgetary control: 9
M3 Uses of different planning tools that are applied for budget preparation and forecasting:. 11
TASK 4..........................................................................................................................................11
P4 Comparing adoption of management accounting systems by organizations as a respond to
financial problems:.....................................................................................................................11
M4 Analysis of respond towards financial problem with management accounting for achieving
success of business:....................................................................................................................13
D3: Evaluating ways in which planning tools respond for solving problems related to finance
for leading organization to sustainable success:........................................................................13
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Management accounting can be explained as a practice that involves identification,
measurement, analysis, interpretation as well as communication of financial data that an
organization pertains. This information is utilised by managers of company with the motive of
obtaining goals of an enterprise. It differs from financial accounting as purpose consisted with
management accounting is providing assistance to internal users of an entity for making well-
informed decisions (Bebbington, 2017). Basis of this report is examination of management
accounting practices incorporated in Capital Joinery. In this report various types of management
accounting systems are evaluated along with their essential requirements. Further, management
accounting reports are described and essential requirement incorporated with it is analysed.
Along with it, income statement in prepared on the basis of marginal as well as absorption
costing. Further, planning tools consisted for budgetary control is identified and their advantages
as well as limitations are discussed. Additionally, financial problems are interpreted and
monitory control measures which can be implemented for solving such issues are identified.
TASK 1
P1 Description of management accounting and providing essential requirements of different
systems of management accounting:
Management accounting is a technique that records transactions related to finance
which can be used by managers to gain necessary information about company's position for
improving their strategy making procedure and making adequate decisions regarding important
matters of n organization (Bromwich and Lapsley, 2017). Management accounting system is a
platform that tracks financial details of an enterprise. It enables management of Capital Joinery
to gain clear overview about fund transactions pertained in business. Management accounting
system are of various types which are discussed below along with their benefits:
 Price optimisation system: This system is utilised for calculating variations in demand
in relevance to changes in price level of products of company. This data results in
combination of cost information and level of stock for recommending suitable price that
leads to profit improvement.
Essential requirement: Application of this system in Capital Joinery results in providing
financial benefit to an enterprise as adequate price level of product helps in attracting and
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retaining customers for longer time period. It fulfils information requirement of an enterprise in
relation to customer reactions through demand variations. It helps is aligning business goals and
expectations of consumers (Burritt, 2015). It automates the process of price setting and helps in
gaining optimization in context to price. Hence, quick decisions can be made by management
which pertains positive influence on company.
 Job costing system: It involves procedure of information accumulation in relation to
costs that is associated with specific job or production process. This tracking method
determines cost of separate job which enables Capital Joinery to track information
regarding performance of each job.
Essential requirement: This system of job costing enhances profitability of Capital Joinery as it
separately assigns cost to each operations which provides required information to managers to
calculate profit margin of each job. This helps in setting adequate organizational structure in a
way that ensures expense minimization and performance maximization. It improves accuracy
and scalability in monitoring of business operations (Callahan, Stetz and Brooks, 2016).
 Inventory management system: Utilization of this system is for the purpose of
managing and monitoring position of stock in in organization. It tracks amount of
inventory available in Capital Joinery which provides warning to managers to purchase of
required inventory and avoid over stocking as well as under stocking.
Essential requirement: Inventory management system is vital for analysing level of stock in
business. This helps management in keeping required information regarding stock and ensuring
that needed safety stock is available so that business operations are not hindered. This
information play a critical role in adopting efficient management style for productivity
improvement.
 Cost accounting system: It is a platform which tracks cost information associated in
business. In other words, this framework helps managers of Capital Joinery in estimating
cost of its products with the motive of profitability analysis (Davies and Crawford,
2018). This system computes expenses associated with manufacturing or production
costs. Different types of costs, such as, labour, raw material, overhead etc. are taken
consideration while preparing this system. Hence, cost accounting report provides
summary of information regarding expenditure.
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Essential requirement: Cost accounting system helps in disclosing costs incurred in business
which guides management in applying organizational structure which enhance future policies of
production. It ensures implementation of controlling activities for expenses assigned towards
material and supply activities. It enables managers to realise margin of profit that Capital
Joinery enjoys in context to business expenses. This is an effective technique which provides
guidelines for implementation of cost control activities for improvement of net profit.
P2 Describing various methods of management accounting reports:
Management accounting reports is a technique that enables management of business to
record its financial results. It enables providing financial information regarding day to day
business operations to administrators of Capital Joinery for the purpose of enhancing their short
term and long tern decision making process (Endenich and Trapp, 2020). This information is
essential for internal stakeholders of an organization for improvising sustainability of an
enterprise. Types of management accounting report are discussed below:
 Budget report: This managerial accounting report is a critical tool for measuring
performance of company as it helps managers of Capital Joinery to understand costs
incurred in business as well as revenues generated by it. It evaluates expenses of past
years and hence enables management to adequately estimates expenses and income for
upcoming period of time.
 Accounts receivable report: This report is focused on credit that is incorporated with
business. This report is prepared for recording receivables of Capital Joinery along with
time period that is taken by company to receive payments from its debtors. It helps
managers to eliminate high account receivable period so that a organization does not have
to face issues regarding cash flow. In addition to it, risk factor linked with occurrence of
bad debt is also reduced by preparation of accounts receivable report (Fry, Steele and
Saladin, 2019).
 Performance report: Computation of this report is for the purpose of performance
evaluation of company. This report provides overview of performance of different
departments within Capital Joinery. It outlines performance of business and hence assists
management of an enterprise in development of an enterprise. Recording of entity
performance is essential for evaluating sectors which are profitable and identifying as
well as improving unprofitable sector.
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 Inventory management report: Management of inventory is vital for business for
analysis its expenditures in relation to stock management. Hence, inventory management
report is prepared by company to evaluate position of its stock so that management can
ensure availability of required inventory in order to maintain smooth operations of an
organization.
M1 Evaluating advantages of management accounting system and its application in context to
business:
Management accounting system is very helpful in managing the accounts of the financial
statements of the organization in a efficient manner by the analyse of the different system.
 In the price optimization system it is used for decide the price of the manufacture product
to meet the customer demand by the Capital Joinery Ltd.
 In the job costings system it is used to distribute the job cost among different department.
 In the inventory management system it is used to manage the inventory, so there is no
shortage of the raw material is identified in the production department.
 In the cost accounting system there is the determination of the cost is used by different
methods like cost control.
D1 Critically evaluating ways in which management accounting reports and systems are
integrated within process of organization:
In the Capital Joinery limited, there is the use of the reports and system for the better
management accounting if the financial statements. In the system there is inventory management
system and price optimization is used to determine the stock and price of the product which help
in increase the revenue of the firm (Håkansson, Kraus and Lind, 2015). In the reports there is use
of the budget report which is used for making budget for the revenue and expenditure. In
performance report thus report is made to determine the performance of the different department
in the company, in which there is the need of improvement.
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TASK 2
P3 Calculation of adequate techniques of cost analysis for the purpose of preparing income
statement by marginal and absorption costs:
Marginal costing: It indicates evaluation of increment as well as decrement in cost of
manufacturing an additional unit in business. It helps Capital Joinery to determine at total of
direct material and labour cost and other direct variable expenses.
Marginal costing
Particulars may June
sales 25000 18750
Less: variable costs
variable sales commission 500 375
variable manufacturing cost 2000 1500
direct material 6000 4500
direct labour 4000 3000
total marginal cost of sales 12500 9375
contribution 12500 9375
Less: fixed cost
fixed selling 1000 1000
fixed production overhead 2000 2000
fixed administration 3000 3000
net profit 6500 3375
Absorption costing: This technique of management accounting involves determination
of both variable as well as fixed cost in relation to manufacturing and providing services by
business (Hammad, Jusoh and Ghozali, 2013).
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Absorption costing:
Particulars May June
Sales 25000 18750
Less: Cost of goods sold
Variable sales commission 500 275
Variable manufacturing cost 2000 1500
Direct material 6000 4500
Direct labor 4000 3000
Fixed production expenses 2000 2000
Gross profit 10500 7475
Less: Selling and distribution costs
Fixed selling 1000 1000
Fixed administration 3000 3000
Net profit 6500 3475
Particulars May June
Profit/ loss under marginal costing 6500 3375
Less: Profit under absorption costing 6500 3475
Add: closing stock 8000 6400
Over absorption 8000 6300
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Material variances
Particulars Results
Material cost variance
standard cost 24000
actual cost 22400
result 1600
material price variance
standard price 12
actual price 9.3
actual quantity 1000
result 2700
material usage variance
standard quantity 2000
actual quantity 2400
standard price 12
result -4800
LIFO:
DATE RECEIPT Issue balance
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quantity
unit
cost amount
Quantit
y
unit
cost amount
quantit
y
unit
cost amount
01/06/2
0 balance 10 35 350
01/06/0
9 15 38 570 15 38 570
01/06/1
5 12 38 456 3 38 114
10 35 350
01/06/2
0 10 32 320 3 38 114
10 35 350
10 32 320
01/06/2
3 10 32 320 3 38 114
10 35 350
01/06/2
7 3 35 105 3 38 114
7 35 245
01/06/3
0 2 35 70 3 38 114
5 35 175
27 951 8 289
8

Average cost method:
DATE RECEIPT Issue balance
quantity
unit
cost amount
Quantit
y
unit
cost amount
quantit
y
unit
cost amount
01/06/2
0 balance 10 35 350
01/06/0
9 15 38 570 25 36.5 912.5
01/06/1
5 12 36.5 438 13 36.5 474.5
01/06/2
0 10 32 320 23 34.25 787.75
01/06/2
3 10 34.25 342.5 13 34.25 445.25
01/06/2
7 3 34.25 102.75 10 34.25 342.5
01/06/3
0 2 34.25 68.5 8 34.25 274
M2 Accurate application of techniques of management accounting for production of financial
reporting documents:
Management accounting technique plays a vital role in identification and analysis of
accounting information with the motive of guiding managers in making adequate decisions.
Hence, preparation of marginal costing income statement provides overview of Capital Joinery
profitability in context to variable expenses. While, income states on absorption costing method
outlines profit that business generates after bearing both fixed and variable costs.
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D2 Production of financial reports that accurately applies and interprets business activities:
On the basis of above income statement of Capital Joinery it can be interpreted that
business should focus on improving its profitability as its net profit has reduced from May to
June. It net profit through marginal costing was 6500 in May while it reduced to 3375 in June.
Similarly, in absorption costing it produced reduced from 8500 to 5375.
TASK 3
P4 Evaluating advantages and disadvantages of different planning tools of budgetary control:
Budget: It is a type of financial plan which is used by the companies for the purpose of
assuring proper utilisation of resources. It is essential for all the management accountants to
make sure that they are able to formulate the budgets in systematic manner (Henri, 2018). In
Capital Joinery the managers are formulating budgets to carry out all the operational activities
systematically. While planning to take control over budgets the managers are paying attention
towards budgetary control. It facilitates the ignorance of overspending of funds. There are
various types of planning tools that are used by the managers in Capital Joinery for the purpose
of carrying out all the activities in systematic manner. Discussion of all the planning tools is as
follows:
Cash budget: In this budget detailed information regarding cash inflow and outflow is
recorded so that the managers can determine actual available funds for the operational activities.
In Capital Joinery it is formulated by the management for keeping detailed information of
receipts and payments that are made in cash. By using it managers try to analyse the liquidity of
business so that funds could be assigned to different activities. The advantages and disadvantages
of it are described below:
 Advantages: By using it actual cash which is available to business could be analysed. In
this type of budget all the expenses and incomes are classified on the basis of cash if they
will not be in the form of cash then they will not be recorded in it.
 Disadvantages: The information which is recorded in it is historic which may affect the
accuracy of results. There is lack of originality in this type of budget because most of the
companies are making transactions on credit basis rather than cash basis.
Zero based budget: It could be defined as a budget which is used by the business for
determining actual information regarding transactions for current year as it starts with zero base
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and keep the information of one year only (Hopper and Macintosh, 2015). It is formulated by the
management teams of Capital Joinery for the purpose of analysing actual position of business.
While recording information in it the managers are required to make sure that they justify all the
incomes and expenses that are recorded in it as it is needed to formulate the budget accurately.
Some of the main advantages and disadvantages of it are discussed below:
 Advantages: With the help of it, accurate and actual information of all the operations
could be determined which can help to analyse the financial position for the year. It
results in higher level of staff involvement in business as it provides detailed information
to all the employees.
 Disadvantages: The process of formulating this budget is very difficult and for
formulation of it the enterprise may have to hire an experienced manager. It may result in
higher cost to the company which is associated with this budget.
Master budget: It is a budget which is mainly used for financial planning as it includes
details of all the operating, financial and lower level budgets (Kaplan, 2019). By using it
managers can analyse actual position of business as it is a summary of all the main budgets that
are generated during the accounting year. In Capital Joinery it is generated by the managers for
assuring the combination of all the small budget. It includes the details of all the HR, marketing
and other department’s budgets. There are various advantages and disadvantages of it and all of
them are listed below:
 Advantages: By using it managers can establish coordination between different budgets
that are formulated by various departments within the organisation. As it keeps summary
of all the budgets so it could be used in future planning and result in appropriate
formulation of plans (Kotas, 2015).
 Disadvantages: It only covers brief information of all the budgets it cannot guide the
managers to analyse detailed information of each and every transaction that took place
during the accounting year. Apart from this, if changes will be made in future then it will
result in confusion as there is lack of flexibility in it.
M3 Uses of different planning tools that are applied for budget preparation and forecasting:
Budgetary planning tools are useful for setting estimation of business expenses and
income so that Capital Joinery in can perform its operations accordingly and gains sustainability
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and profitability. Cash budget, master budget and zero based budgets are some planning tools
which can be applied for this purpose.
TASK 4
P4 Comparing adoption of management accounting systems by organizations as a respond to
financial problems:
Financial problems can be defined as issue that organization faces due to insufficiency
of monitoring and controlling activities in relevance to finance. Such problem proves as a
hindrance in increment of profitability of business hence needs to be eliminated by managers for
improving business efficiency (Löfsten and Lindelöf, 2016). In relevance to business, issues that
is faced by entity in relation to finance are discussed below:
 Issues regarding management of cash flow: Issues regarding cash flow indicates
insufficiency of company in maintaining liquidity for day to day operations of business.
Further, problems regarding payment of short term obligations also arises due to this
reason.
 High storage cost of inventory: High storage costs refers to high expenditures that
company bears for storing stock of business. This leads to increment of overall
expenditures of company hence, reduces its profit margin.
Various monitoring techniques or tactics can be implied by managers of business for
identifying problems in context to finance. Some of these tools are discussed below along with
their utilization in problem identification:
 KPI: Key performance indicator or KPI is a framework that determines progress of
company towards its intended results. Such performance indicators are of two types, that
is, financial and non-financial. Financial KPI is helpful for evaluating financial
performance of company and non-financial KPI involves measurement of different
business operations such as, employees, customer relationship etc. This tool is effective
for identifying issue related to high storage cost of business as it studies performance of
different sectors (Otley and Emmanuel, 2018).
 Benchmarking: This states procedure of comparing policies and process of business
activities by evaluating its result and comparing it with standards set by management. By
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applying this monitoring tool, company can identify issues regarding cash flow
management.
Financial governance: It refers to collection and monitoring of business information in
context to its financial transactions. It involves procedure of tracking financial performance of an
enterprise which enables management to control problematic financial areas and gain expertise
and profitability in operations of entity.
BASIS WALMART ASDA
Cost accounting system Financial issue that Walmart
faces is regarding improper
management of cash flow.
This problem can be solved by
management of company by
applying job costing system.
Reason is that costing
accounting system tracks costs
that business bears business
activities hence, provides
required information for
guiding managers regarding
position of cash in entity
(Sofian, Tayles and Pike,
2014).
Overspending is a financial
issue that Asda faces. This
problem can be resolved by
managers with application of
cost accounting system which
provides opportunity to
identify and eliminate
unnecessary cost. This helps
in improving profitability of
an organization
Inventory management system Another issue that Walmart
faces is related to high
expenditure for storing
inventory. Best suited system
for resolving this issue is
inventory management system
as it tracks level of inventory.
Thus, managers can avoid
over stocking of inventory so
Probl of unsufficent inventory
or over stocking can lead to
huge loss for business. such
issue can also be resolved by
using inventory management
system as it tracks position of
inventory in company.
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that additional cost associated
with storing it in warehouse
and maintaining to avoid
damages can be eliminated.
KPI Issues such as involvement of
non productive assets can be
resolved by using key
performance indicator.
Financial problem of high
business expenses can be
solved by using KPI tool as it
tracks performance and
productivity and profitability
of business assets.
Benchmarking Issue of lack of capital can be
solved by using benchmarking
tool as it evaluates business
activities with another similar
entity which helps in accurate
decision making.
Unforeseen expenses is a
financial problem that can be
solved by applying
benchmarking tool as it tracks
performance of business with
estimated results.
M4 Analysis of respond towards financial problem with management accounting for achieving
success of business:
Management accounting serves as a tool for identification as well as elimination of
financial issues that Capital Joinery faces. It avoids hindrances that can occur in business due to
such issues and improves productivity of company. Reason is that financial information is
tracked through management accounting hence, managers can overview issues regarding same. It
leads to proper flow of cash and management of inventory for efficiency improvement.
D3: Evaluating ways in which planning tools respond for solving problems related to finance for
leading organization to sustainable success:
Cash budget is helpful for solving issues regarding improper management of cash flow.
Further, master budget enhances performance of business by solving issues regarding inefficient
financial planning of Capital Joinery. Zero based budget helps Capital Joinery to align with
current trends by elimination past operations.
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CONCLUSION
This report concludes that management accounting is an efficient technique that outlines
financial position of an entity. Hence, management accounting system tracks financial
transactions of business which leads to improvisation of efficiency as it guides entity's decision
through providing required information. Different methods are used for reports of management
accounting. Additionally, budgetary control planning tools pertains several pros as well as cons.
Along with it, this report states that management accounting system is adequate technique for
resolving issues related to finance that is incorporated in an organization.
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REFERENCES
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