Management Accounting Systems and Its Applications

This document provides an overview of management accounting systems (MAS) and their applications in business entities. It covers the principles and origin of management accounting, the difference between management and financial accounting, and various types of MAS such as cost accounting, inventory management, job costing, and price optimization systems. The document also discusses the benefits of MAS and presents information on budgetary control and planning tools like budgeting and cash budget.

Management
Accounting Systems
And It's Applications

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................7
TASK 3..........................................................................................................................................13
TASK 4 .........................................................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
The term management accounting (MA) is a way of accounting in which
companies all kind of transactions' information including monetary and non monetary
aspects is recorded in a systematic manner (Yigitbasioglu, 2017). Under this accounting
the purpose of recording these information is to produce internal reports that may help
to management department in effective decision making regards to different context.
The aim of project report is to spread out information about role of MA for business
entities. For better understanding a company has been selected that is KEF limited. The
company operates in manufacture sector. The report covers detailed information about
various management accounting systems (MAS), MA reports and planning tools. Along
with role of MAS in sorting monetary issues is also described under the report.
TASK 1
Introduction of MA:
MA and its definition.
MA – This accounting is a systematic process of recording and presenting quantitative
& qualitative information in the form of internal reports. It is not essential for companies
to apply this accounting in their operations.
Definition of MA:
According to Charted Institute of Management Accountants (CIMA), MA is “the way of
identify, analyse, producing, interpretation of information that is needed by managers in
order to plan and control in a business entity.”
MAS – The term MAS can be defined as those accounting systems which aligns with
business operations and provide framework to managers in effective management
(Nielsen, 2015).
Importance to integrate MAS with organisations:

This is important for businesses to integrate different accounting systems with
their operations and activities. Such as for finance department, it is important to link cost
accounting system so that expenses can be controlled. As well as for production
department, inventory management system can guide in order to manage overall stock.
Like in KEF limited company, they are using these accounting systems in their different
operations and activities.
Principles, role and origin of MA:
Principles- There are mainly four kind of principles of MA and each business entity is
needed to comply with these principles:
 Influence- This principle of MA defines that it is important to communicate
accounting information among managers so that they can take corrective actions.
 Relevance- In addition, this principle states that MA evaluates the key
information that can be helpful for better decision making in companies
operations (Cazier, Tian and Wilson, 2015).
 Value- This principle of MA states that it links the company's process to its key
models and demands of the wide economic environment.
 Credibility–According to this principle, if companies apply the MA in their
operations and activities then it becomes easier for shareholders to relay on
financial outcomes.
Role - The role of MA is too crucial and important for businesses. This is so because it
provides essential framework to users in order to manage different aspects. Like the
above KEF limited company is using this accounting system for gaining competitive
advantage over their rivalry firms.
Origin- The MA evolved after financial accounting and its origin can be traced before
300 years ago. This accounting was firstly used during industrial revolution in the aspect
of European merchant trading ventures.
Difference between management and financial accounting:
Basis MA Financial accounting
Information Under this accounting information While in this accounting only

included regards to both quantitative and
qualitative aspects is included.
monetary information is included.
Preparation of
reports
There is no any specific time and
process to produce the accounting
reports.
On the other hand, this is essential
for companies to prepare monetary
reports at the end of accounting
period.
Different types of MAS:
 Cost accounting system- This accounting system is associated with controlling of
overall expenditure by systematic recording of entire financial transactions. It is
essential for companies in keeping expenses of each units' cost below standard
cost (De Loo, Cooper and Manochin, 2015). The KEF limited is using this
accounting system for controlling their manufacture cost.
 Inventory management system–In this accounting system stored quantity of
different form of materials is valued by techniques like LIFO, FIFO etc. This
accounting system is essential for production departments take their actions
regards to manufacturing and buying of new goods. The KEF limited is
implementing this accounting system in their production process so that their cost
of storage can be minimised.
 Job costing system- Under this accounting system, cost of each produced items
is evaluated by assessing job cost involved into different activities. It is essential
for those companies which produce a wide range of products. In KEF limited
company, their finance department use important by this accounting system
about each job cost involved in completion of tasks.
 Price optimisation system- This accounting system acts accordance of a
systematic procedure that starts from gathering information about customers
feedback about prices of products. On the basis of it companies revise their
pricing strategies. This is essential for companies whose sales revenues are
decreasing because by help of it, they revise their prices which influence their
sales. The above KEF limited company revise their prices as according to their
customers demand.

Benefits of MAS:
 Role of cost accounting- This helps in reducing unnecessary costs from
operations and activities by effective management. The above KEF limited
company's overall operational cost is decreasing that is helping them in
generating higher revenues.
 Role of inventory management system- It benefits to companies in keeping cost
of inventory lower so that overall cost can be reduced (Charifzadeh and
Taschner, 2017). The above company is using this accounting that helping their
manufacturers in producing products as per market demand.
 Role of Job costing system- As above stated, it helps in computing each units'
cost. In KEF limited company, their accountants evaluates manufactured outputs
cost by calculating each job cost.
 Role of price optimisation system- On the basis of this accounting system, prices
of products are revised and set according customers feedback. The sales
department of above company utilise key information about demand of their
products in market and after that set the price.
Presenting financial information:
Reason for which information should be reliable, up to date and accurate- This is
important that financial information should have below mentioned features:
 Relevant- The monetary information should be relevant as accordance to
companies operations. This is so because in the absence of it, accountants can
not produce accurate reports.
 Up to date- In addition, financial information should be up to date because
companies do the transactions on regular basis. If information will be updated
that current performance can be evaluated.
 Accurate- The financial information is needed to be error free so that correct
decisions can be taken by companies about different aspects (Vann, 2016).
 Understandable- Along with the monetary information should be understandable
for all users, specially for managers so that they can prepare futuristic strategies.

MA reports:
 Inventory report- Under this report information about how much quantity of
material is being purchased, sold and utilised for production during a particular
time period. The above KEF limited company's accountants are preparing this
report for managing storage cost and for better utilisation of all materials.
 Performance report- It is a kind of report that contains information regards to
actual outcome and estimated outcome as well as variation between these. On
the basis of it, managers take decision about progress of employees and
business entity. In above company, this report is being used in order to manage
performance of each aspects.
 Account receivable ageing report- The report consists information about those
debtors whose amount is due even after the predetermined date. On the basis of
it, finance department makes plan about sources of fund. In the above company,
this report helps in keeping debtors collection period lower.
TASK 2
 Cost- This can be defined as an overall expenditures which occur in process of
completing different operations and tasks. There are different kind of costs such
as direct material cost, labour cost, indirect cost and many more.
Fixed cost- Fixed cost is a type of cost which does not effect due to change in level of
production.
Variable cost- While the variable cost is a kind of cost that flex as accordance of
change in production.
Direct cost- It can be defined as a type of cost that is directly accountable to a
specific cost objective.
Indirect cost- This is a kinds of cost which is not directly linked o a specific cost
objective.
Different costing techniques:

 Absorption costing- Under this costing, both fixed and variable costs are
absorbed for income statement preparation. It has below mentioned advantages
and disadvantages such as:
Advantages- The key benefit of this costing is that this is compliance with GAAP and
more effective in order to track profits effectively (Arunruangsirilert and Chonglerttham,
2017).
Disadvantage- This costing technique is not helpful for enhancing operational efficiency.
 Marginal costing- In this method fixed cost is assigned as period cost and
variable cost as unit cost. It has below mentioned advantages and disadvantages
such as:
Advantages- This costing technique is beneficial in order to remain constant in nature.
Disadvantage- Under this time element is ignored completely.
Preparation of profit and loss statements under absorption costing:
Absorption costing Marginal costing
Direct material 15 15
Direct labor 25 25
Variable production OH's 10 10
Fixed production OH's (130000/20000) 6.5
Total cost 56.5 50
Statement of profit or loss using absorption costing for June:
No. of units £/Unit £ £
Sales 18000 70 1260000

Cost of sales: 0 56.5 0
Opening stock 19000 56.5 1073500
Add- Production 1073500
Less- Closing stock 1000 56.5 56500 -1017000
Profit 243000
Less- Under absorption 13000
Reconciled profit with the marginal
costing
230000
Statement of profit or loss using marginal costing for June:
No. of units £/Unit £ £
Sales 18000 70 1260000
Prime cost:
Opening stock 0 50 0
Add- Production 19000 50 950000
Less- Closing stock 1000 50 50000 -900000
Contribution 360000
Less- Fixed production cost -130000
Profit 230000

Fixed overheads absorbed on 18000 units (18000*6.5) = 117000
Fixed production overheads = 130000
Under absorbed the fixed cost= -13000
When the production is 20000 units and closing stock is 2000 units
Statement of profit or loss using marginal costing for June:
No. of units £/Unit £ £
Sales 20000 70 1400000
Prime cost:
Opening stock 0 50 0
Add- Production 22000 50 1100000
Less- Closing stock -2000 50 -100000 -1000000
Contribution 400000
Less- Fixed production cost -130000
Profit 270000
Statement of profit or loss using absorption costing for June:
No. of units £/Unit £ £
Sales 20000 70 1400000
Cost of sales:
Opening stock 0 56.5 0

Add- Production 22000 56.5 1243000
Less- Closing stock -2000 56.5 -113000 -1130000
Profit 270000
From the above mentioned costing systems, this can be suggested to above company that they
should make focus on implementation of absorption costing system.
Other techniques:
Apart from above mentioned techniques there are some other techniques such
as ABC, standard costing and many more that can produce accurate results in an
effective manner.
TASK 3
Advantage and disadvantage of planning tools of budgetary control.
Budgeting- It is a type of technique which is associated with process of setting futuristic
monetary goals in order to measure actual performance (Rubin, 2019). In simple term,
this is linked with making financial plan so that it can be determined whether companies
have enough amount of fund to operate various activities or not. This is beneficial for
business entities due to following reasons:
 It is beneficial for companies in order to make better control over available
amount of funds.
 In addition, it plays a significant role in identifying total number of spendings and
savings.
 It helps in determining how much amount of debt can be opt out business entities
(Wildavsky, 2017).

Budgetary control – It can be defined as a type of method that is related with managing
monetary outcomes in an effective manner by help of vital range of budgets. In KEF
limited company, they are using different kind of budgets such as:
 Cash budget – It is a kind of financial plan under which information regards to
activities of in and out of cash. This budget is prepared in those business entities
wherein cash regarding activities are done on a regular basis. In the above
company, their managers use key information from this budget in order to
manage working capital requirement. It has some advantages and disadvantages
like:
Advantages- This budget helps to companies in identifying deficits on priority basis.
Disadvantage- Due to this budget, managers can not utilise fund as accordance of
business need. They tends to follow the cash budgets' activities.
 Rolling budget- This is a type of budget, that is rolled out soon after end of
previous years' accounting period (Murthy and Rooney, 2018). The KEF limited
company is using this budget as after end of their accounting period.
Advantage – This is beneficial for becoming responsive to users in order to adjust
unexpected changes in an effective manner.
Disadvantage- This budget is not suitable for those companies wherein activities
change year by year.
 Production budget- It is a budget in which estimation of activities regards to
materials and funds needed for production is included. The KEF limited
company, is preparing this budget for their manufacturing process.
Advantage- This is helpful for companies to make their production cost effectively.
Disadvantage- In some cases, wrong estimation of needed quantity of material or fund
may lead to huge financial lose.
Balance scorecard- It can be defined as a kinds of performance measurement
framework which is linked with process of finding and enhancing different business

functions as well as their external outcomes (Nørreklit, Kure and Trenca, 2018). This
can be used by companies in order to assess financial position of various kinds of
aspects. It becomes possible because by help of this businesses can become able to
keep an extra sight of eye over each element or function which is performed in external
environment.
SWOT- This is a kinds of tool that analyse companies strength, weakness, opportunity
and threats in an effective manner (Jaber, Alasis and Kostas, 2015). Such as in the
aspect of above KEF limited, this can be used in order to assess their opportunities and
weaknesses. It has below mentioned advantages and disadvantages such as:
Advantages-
 This is source of information for companies in order to do strategic planning.
 As well as it helps to companies providing data regards to past, present and
future.
Disadvantage
 One of the key drawback of this tool is that is focus on only subjective analysis.
 As well as it requires more number of cost and time (Shahba, Monavari and
Ghodusi, 2017).
Planning tools for forecasting of budgets.
The role of planning is too critical in order to produce budgets. There are vital
range of planning tools like ZBB, static budget, variable budget and many more. All
these budgets help in order to projection of revenues and costs. In the KEF limited
company, they are using various types of budgets such as rolling budget, production
budget in order to forecasting of their different aspects of futuristic income and
expenditures.

TASK 4
Difference between companies in order to sort monetary issues.
Monetary problems – It can be defined as a type of issue that incurs in companies
because of ineffective management of financial resources. Due to this inefficiency,
business entities do not have enough amount of funds in order to complete their
different kind of activities. Some common types of monetary issues are like:
 Increasing total expenditures- This is a type of issue in which companies' total
amount of expenses increase continuously because of poor control over activities
and functions (Ruch and Taylor, 2015). As a result business entities not have
enough value of funds in order to complete different types of activities and
operations. Such as in the context of above chosen company, KEF limited they
are facing this issue because their production cost is raising significantly. Due to
this they do not sufficient amount of funds for completing rest of other activities.
 Decreasing total sales- Under this financial issue, the total sales revenue starts
to decrease as compare to past years. The reason of increasing this financial
issue is lack of sold units or output in a particular time period. Eventually, this
monetary issue effect to companies' competitive edge because as sales revenue
decrease then they will not have enough source of funds.
Techniques to deduct financial issues:
 Ratio analysis – Under this methodology, a wide range of ratios are calculated
and interpreted in order to assess actual financial condition. By help of it,
companies become able to focus on those aspects that are leading as lower
result as compare to standard output. For example the above KEF limited
company, is using this technique for effective management of their monetary
issues. It becomes possible as they calculate different profitability ratios in order
to gather information about total expenditures.
 Key performance indicator – It is a type of technique that is being used by
companies in order to focus on those aspects that are producing higher result
(Hyndman, 2016). By accessing key information through this method, managers
of companies can easily analyse cause of monetary issue in companies. Most of

the business entities are using this method not only for find out exact monetary
issue but also for proper management of their overall performance.
Comparison :
Basis KEF limited TPG processing
Monetary
issue
The company is facing monetary
issue of increased amount of
expenditures in their operations
and activities. In other words their
actual expenditure are more then
to standards. Due to this, they do
not have enough amount of funds
to complete their production.
Their financial issue is decreasing
in total quantity of sales output. As
a result they do not have enough
amount of funds in order to pay on
rest of business operations and
activities.
Management
accounting
system
They are using cost accounting
system in order to manage their
overall expenditures in an efficient
manner. By using this accounting
system they are able to allocate
their funds as accordance of need.
Due to this they are getting able to
keep expenditure of each produced
items cost below standard cost.
Their financial issue is being sorted
by help of Price optimisation
system. It is so because by
applying this accounting system
they are able to make change in
their prices as accordance of
suitability of their customer
segment. Thus, their financial issue
has been sorted by help of this
accounting system.
MAS to respond against financial issue.
In order to sort monetary issues, MAS is too crucial because these systems
tracks and sort issues in an effective way. In above KEF limited company, they are
using cost accounting system for sorting out issue of higher expenditure. This, states
that different types of MAS play a key role to overcome the issues.

Planning tools for solving financial issues.
Under planning tools various kind of budgets are included such as ZBB, flexible
budget, fixed budget and many more (Guinea, 2016). Each budget has some specific
feature in order to sort out issues. It is so because budgets consist information about
estimated income and expenditures. Like In KEF limited company, they are using
different types of budgets such as rolling budget, cash budget for solving financial
problems.
CONCLUSION
On the basis of above project report it has been articulated that MA is becoming
an essential accounting system for companies. In the report different types of MAS like
job costing system, price optimisation system are concluded as well as MA reports are
also prepared. Further part of project report, includes income statements as accordance
of given data. In addition role of planning tools and MAS is concluded for sorting
financial issues.

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